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Crude Volatility Here to Stay as Traders Eye OPEC

by Fawad Razaqzada

Last week was a volatile one for crude oil. Brent and WTI prices rose in the first three days of the week but then gave back much of those gains in the last two. Nevertheless both contracts managed to eke out gains for the week and it was the first positive week in four for Brent. The selling pressure has continued at the start of this week, though there have been some wild intra-day swings. The extreme volatile price action is understandable given that the OPEC meetings are a few days away. No one wants to be caught on the wrong side of a big move, so both the buyers and sellers are evidently booking quick profit each time the market makes money available to them. But the overall feeling is that the OPEC will not make any changes to its production quota, meaning that the global surplus will remain in place for some time yet. For that reason, oil prices are generally drifting lower.

The persistently weaker oil prices means pressure is growing on Saudi Arabia to cut production after it convinced the cartel to keep oil output high in order to maintain market share and presumably squeeze shale and other weaker producers out of the market. That strategy has so far failed to work effectively with rivals proving to be surprisingly resilient and shale output has fallen only slightly. Meanwhile, as mentioned, oil prices have dropped far more, and remained depressed longer, than what the Saudis and indeed many other oil producers had envisaged last year. Saudi’s oil minister last week appeared as if he had changed his tone slightly and this has led to some speculation that the OPEC’s largest player may rethink its strategy. However it is unlikely that a production cut will be agreed upon as Saudi and a few other OPEC members can still survive at current oil prices for a lot longer than some of their rivals. So although prices being this low may be uncomfortable for the OPEC for now, it may still pay off in the long term as soon or later some of the weaker non-OPEC producers will be forced out of the market. With rig counts continuing to drop, it could be only a matter of time before the rebalancing process begins to accelerate and the market tightens.

But in the near-term and in light of the still-oversupplied oil market, any price gains are likely to be short-lived, especially since Iran is most likely to increase its crude output as more sanctions are lifted. Brent crude was trading below the $45 a barrel mark at the time of this writing. It was thus continuing to hold above the key $43.50 - $44.00 area. This is where a Bullish Gartley pattern resides, which can sometimes pinpoint major lows in the markets. As this pattern is holding so far, there is still the possibility we may have seen the bottom in oil. Although Brent momentarily took out important resistance around the $45.00-$45.20 region, it has failed to break the more important $46.40 handle which was previously support. If this level now breaks then we may see a more aggressive rally, at least towards the bearish trend and the 50-day moving average, around $48.00 next.

But if Brent fails once again at these levels and eventually falls below the abovementioned Bullish Gartley support, then the next logical target for the bears would be the August low around $42.20. Thereafter a more significant Bullish Butterfly pattern comes in around $39. This formation is the same as the Gartley in that it is constructed by Fibonacci levels, but the point D comes in below the 100% retracement of XA, in this case at the 127.2% extension level. The CD leg is also extended – in this case, by 161.8 per cent times AB. The area around $39 is also where the 261.8% of the BC move resides, thus making it an exhaustion point. But will oil even get to $39 and even if it does, will it necessarily form a major base there? We could simply see a short-term bounce, before the trend resumes and oil prices fall further. So treat all these Gartley/Butterfly and indeed any other technical patterns with caution, especially when going against the underlying trend.

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