Chart of the Day: WTI crude (XTIUSD)
It was a huge night for markets, with some sizable reversals in equity indices, US Treasuries, and the likes of USDJPY and AUDUSD. WTI crude was perhaps the most volatile instrument, with price trading into US$50.50 and testing the June lows before finding buying support.
The fact so many are talking about a slowdown in global economic activity has resonated in the crude market, with a growing belief that demand will fall away. We can marry this demand concern with a 2.38mil barrel build in the weekly DoE crude inventory report, with the market looking for a 2.5mil barrel draw, and the bid completely came out of the oil market, and the price fell aggressively into US$50.50.
The fact that the market defended the June lows is interesting. We can see on the four-hour or daily candle the extent of the rejection and the long wick from the lows. A higher-high and a rally through US$53.70 today would obviously be bullish, although I want to see how price reacts into the five-day EMA (blue line). That’s because if we see traders using this area to fade the rallies, then it raises the probability of a retest of these lows. A close above the five-day EMA would suggest we’ve put in a short-term low.
The rally seems to fit well, with reports that the Saudis are working on a plan with other oil-producing nations to discuss a policy response to curb the oil slide. We don’t know what these measures will be at this juncture, but we know Saudi Arabia is already running production levels under the previous agreed OPEC output curbs. So, simply cutting production rates again will unlikely be sufficient in the medium term if we continue to raise fears of a global economic slowdown. The next OPEC meeting is due 9 Sept, so traders will be speculating on the outcome and response to falling prices here.
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