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Technicals Looking Bearish for Crude and Products, Waiting for Fundamental Catalyst

Market Overview

Intermarket relationships are giving mixed signals as crude and product pricing tries to find direction. US Dollar performance and the trend on Eurodollar yields point to short-term gains across the energy complex while global equities suggest bearish price action going forward. Last week’s Oil Market Report released by the IEA on March 15th saw price trade higher toward the end of the week primarily on an upward revision to the 2018 global demand forecast. The IEA now expects 2018 demand to rise by 1.5 million barrels per day. This marks an increase of 100,000 barrels per day over previous estimates. EIA forecasts echo the IEA’s demand growth with projections showing a tighter market for 2018.

Overall, rising US output continues to pressure price, while Middle East tensions and the Venezuelan economic crises offer support at lower levels. In previous weeks, Iran diverged from the OPEC narrative of a price target near $70 per barrel for global crude. Iran suggested that $70 crude is too high of a target and would catalyze another explosive growth in US shale. Toward the end of last week, Saudi Arabia released their own bout of volatility as Crown Prince Mohammed bin Salman told CBS his kingdom would develop nuclear weapons if Iran did the same. While this was a bullish event for oil on rising risk, the statement hints at a further lack of cooperation between Saudi Arabia and Iran that could manifest itself via OPEC production quotas. If the nuclear threat fails to materialize, we expect Iran to increase oil production should their relationship with Saudi Arabia degrade further.

Venezuelan oil production has decreased slightly since the end of December and is down to 1.59 million from 1.62 million. Venezuela’s crypto currency, the Petro, racked up $5 billion in presales for the crumbling country. Whether or not this money makes it back into the economy remains to be seen and additional sales of the currency may be hindered by a fresh round of sanction from the US targeting the Petro. Analysts are still expecting further losses on Venezuelan production.

In the week ahead, we’re expecting high levels of market volatility on a full economic calendar. Our primary focus will be on the FOMC rate decision this Wednesday at 2:00 pm EST. Fed Chair, Jerome Powell, will hold a news conference at 2:30 pm EST following the headline figures. Traders are expecting a 25-basis point increase in the Feds Fund rate with the upper bound rising to 1.75% from 1.50%. The market has fully priced in this expectation with a probability of 94.40%. Beyond this, the market is favoring another 25-basis point rate hike at the June 13th meeting with a probability of 68.10%.

Crude and Product Technicals

WTI Futures

On the 1-hour chart, WTI futures are still consolidating around $62 per barrel and are maintaining a bearish triangle with support near $60. A break below $60 would signal further losses with profit targets at $58 and $56 in extension.

The daily-chart shows crude prices consolidating in a roughly symmetrical triangle. A similar pattern played out last May following a rally from $27.50. A break of the lower support level resulted in a $5 to $6 selloff before price resumed an upward trend.

ULSD Futures

ULSD futures continue to work within a descending on the 1-hour chart with support at $1.81. If this technical pattern is to remain valid we would expect current price to fall from these levels. A break below intraday support at $1.90 should signal a shift in short-term momentum and ideally see price trade lower to $1.84 and $1.81 in extension. A break of support at $1.81 would see us targeting $1.70 on the extension. A break of resistance with a fundamental catalyst should see price climb to $2.00 and possibly $2.10 in extension.

On the daily chart, price is working into a rough head and shoulders pattern with a neckline near $1.85. This pattern is a bearish technical indicator which would be confirmed by a break of neckline support.

Overall, the technicals for ULSD futures are stacking to the bearish side, but we’ll need to see a fundamental catalyst to push prices lower.

RBOB Futures

As with ULSD, RBOB futures are trading within a descending triangle on the 1-hour chart and a head and shoulders pattern on the daily chart. Both patterns share the same support area between $1.87 and $1.85. Any fundamental weakness should see price break below this area and target $1.80 and $1.75.