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03/02/2015: Oil price finally showing signs of support

Measured on Brent Crude, the oil price has now bounced 26% from the low of $45.19 on 13th January. The price of West Texas Intermediate has not been able to rally quite as strongly but today is still up almost 18% from its $43.58 low that it posted just four days ago. Technical indicators on both charts have improved dramatically during these bounces, but I have been saying for a while it would take a key piece of fundamental news to drive the rebound in oil. And it seems as though finally there has been a reaction to the glut of oil supplies. The big question is whether this will be enough to ensure a key low has now been posted.

oil sunset

Last week we saw the Baker Hughes rig count fall dramatically. In just one week the oil rig count in the US fell by 94 (with gas adding 3 and there was another miscellaneous rig to make the 90 in the provider’s table below). This was a record decline in just one week and suggests that finally producers in the US are beginning to react to the low prices. This may not impact on oil supplies straight away, however this is certainly a key fundamental event that the oil traders have been looking for.

Rig count   03022015

At the same time we have been having the results of the oil majors in recent days which have included some significant cuts to future capital expenditure (capex). With Shell announcing last week that it would be cutting its capex by $15bn, now today BP has announced that it will be cutting its own capex by between $4bn to $6bn. These announcements add further evidence to supply reductions in the months to come.

It seems as though the whole world has been sellers of oil in the past 6 months. However in scenarios such as that it does not take much to change sentiment. The short covering has begun.

Technically, the WTI price has also today broken above a key resistance at $51.27 which was a spike rally high from mid-January. With the RSI close to a 6 month high and other momentum indicators such as Stochastics and MACD reacting strongly too, the technical outlook is improving significantly now.

However, we now need to see a few technical developments to start things about serious upside targets:

  • A two day close above $51.27.
  • If there is a correction, support being formed at a higher low (above $43.58) to be followed by a break back above this reaction high – this would begin to form a new uptrend.
  • The higher low preferably coming on support above the 21 day moving average (currently $47.35) which has been consistently seen as a basis of resistance.

Interestingly, the resistance of the top of the old downtrend channel comes in at around $56 today and this is in the middle of the previous consolidation band so is a reasonable target area should we see the price closing consistently above the $51.27 resistance.

WTI   03022015

It is still far too early to day whether there has been a key low formed in the oil price. Ideally there would be more information about demand picking up as well as supply restrictions. However for now the signs are encouraging and the market is certainly changing its outlook. The question remains, how long will this last for?

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.