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Technicals and Shaky OPEC Compliance Point to Further Losses

Market Overview

A strong close in US equities and moderate weakness in the US Dollar saw WTI futures bounce from $60.00 to $62.30 during late week trading. However, OPEC jitters over the weekend led to a good deal of profit taking as hedge funds continue to liquidate their net long exposure. The charts remain bearish during early trading this week as equities are overextended and facing selling pressure while the US Dollar Index is finding support above $90.00. The next level of support for WTI futures exists around $60. We’ll need to see a resumption of risk-on sentiment (i.e. weaker dollar, stronger global equities, stronger gold) for this level to offer anything meaningful.

Scheduled event-risk points to lower levels of volatility, with traders focusing primarily on US CPI and US Retail Sales. On the unscheduled side, OPEC and North Korea chatter should be the focus of the week. OPEC has enjoyed unity in their production cuts for over a year, but that unanimous support may be coming to an end. Iran has expressed concern over Saudi Arabia’s target price for oil at $70. Iran believes $70 oil could cause another explosive growth in US shale which would lead to further market share dilution and another supply glut. Iran has stated they expect to reduce foreign oil imports going forward which could signal their intent to ramp up domestic production. Traders have shown they are sensitive to any dissent between OPEC members as crude oil and products faced heavy selling pressure at the beginning of the week. If dissent among OPEC members increases, we’ll plan for a bearish bias and possible range bound price action over the longer-term.

Crude and Product Technicals

WTI Futures

On the one-hour, WTI futures are working into a descending triangle with a line of support near $60.20. The descending triangle is a technical indicator for future bearish momentum so long as price respects the upper resistance line. Technical chartists will look to build short positions at the upper resistance line and on any breaks below support at $60.20. Technicals work best in conjunction with fundamental catalysts so we’ll be watching for any shift in market dynamics. Analysts are already expecting another build in commercial crude inventories this week which should see added selling pressure enter the market.

On the daily chart, WTI maintains an upward trend but is in the upper half of its channel. Until we see a significant shift in the fundamental environment, we expect price to respect its lower support trendline. We’ll be watching the OPEC development carefully to see if any other member nations begin questioning the $70 price target. Rising supply for OPEC and the US should see WTI futures trade toward $50 per barrel with $60 being a firm line of resistance.

ULSD Futures

ULSD remains susceptible to seasonal weakness as price continuously underperforms when compared to WTI contracts. On the one-hour chart, ULSD futures are trending lower with support at $1.81. As we head deeper into the spring and summer months, we expect ULSD to maintain its underperformance against crude. ULSD’s current short-term technicals favor selling pressure into any rallies, particularly off of the resistance trendline.

On the daily chart, ULSD has a major area of support near $1.85. We’ve bounced from this area twice in the past and are challenging it for a third time. One could argue that ULSD price is setting up a bearish head and shoulder pattern with a rough neckline between $1.81 and $1.85. Overall, the technicals favor further losses and we’ll be watching for breaks below $1.85 and $1.81.

RBOB Futures

As with ULSD, RBOB futures are underperforming WTI over the short and medium term. On the one-hour chart RBOB maintains a downward trend, but to a lesser degree than ULSD. If WTI begins trending lower on the short-term, RBOB will follow suit. However, we expect the magnitude of any moves lower to be suppressed when compared to ULSD as we enter driving season. The daily chart shows RBOB setting a potential bearish head and shoulders pattern similar to ULSD with a neckline near $1.86 on April contracts. The current short-term trendline is a little steep, so we wouldn’t be surprise to see price break above this and challenge the trendline formed using January highs.

Overall, the market is looking fairly bearish as hedge funds continue to liquidate holdings in the face of weakening fundamentals. We’ll need to see global demand firm up, some kind of structural decrease in market supply, or a return of risk appetite before crude and products can challenge their respective highs.