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Is Brent Crude Oil Ready For A Bounce?

Posted on: 03 December 2018 , by: Darren Sinden , category: Market Review

Contrarian: Brent is down by 20% in November however, three key meetings could swing sentiment the other way. 

Last week we looked at the potential upside opportunity in silver. This week I'm staying in the world of commodities—and on the contrarian track— to consider the possibility of a short-term bounce in the price of Brent Crude oil. As I write, the price of Brent Crude has fallen by more than -20% month to date. Only one instrument out of more than forty that I monitor closely has underperformed Brent and that is US Crude, or WTI, which is down by -23% during November.

We have to go back four years to find a comparable move when Brent moved from highs of US$86.90 in November to a December low of just US$56.65 per barrel. The closing months of the year can often have a significant bearing on the oil price as that’s when OPEC, the oil producers’ trade body, holds their annual meeting in the Austrian city of Vienna. They will be meeting there this year on the 6th of December.

Key Meetings Over the Weekend

US-Sino trade tensions have been a grey cloud over financial markets for months and adding to the volatility seen throughout October. A 33% decline in Brent crude from early October to late November has also been a clear talking point, not just because so much investment is tied to this benchmark, and therefore one questions the impact on growth. But importantly inflation expectations have been falling in so many developed markets, and this has seen rates markets price out future tightening from central banks.The G20 meeting was therefore important as it effectively addressed both dynamics. It’s important to understand that expectations of anything substantial were low, so the 3.3% and 2.5% pop (at the time of writing) in US and Brent crude respectively—not to mention the solid rally seen in S&P 500 futures and Asian equities— highlights how easy it was to convince a faction of those short oil to take some exposure off the table. 
Recall on the daily chart Brent crude has not closed above the five-day exponential moving average since the 9th of October, and this short-term average has contained each rally. The fact that price is now above this average suggests price could look to put in a short-term base and perhaps even find rally into the 6th of December OPEC meeting in Vienna. What we have seen from the G20 is a communique that effectively kicks the can down the road and allows some breathing room for markets into the new year. The ‘ceasefire’ to delay the tariff increase on $200bn of goods to 25% and revisit in 90-days has given traders some belief that China can do what’s necessary in this period to appeal to Trump and his trade team, so we may have seen the worst. There is, of course, no guarantees here and it’s easy to be cynical, although neither party want to see another bout of market volatility and will cognisant to stabilise risk.

With so much focus on the sheer lack of comradery and unity between the G20 leaders, it was easy to miss the meeting between Saudi Arabia’s Prince Mohammed and Russia’s Putin. This was essentially a repeat of the September 2016 meeting between both nations that preceded the December OPEC meeting where we saw a firm agreement to cut production and stabilise supply/demand imbalance. What we have heard from the two leaders is a commitment to do what is necessary and address the glut in the oil markets, and it raises the prospect of another coordinated announcement from OPEC and other nations (such as Russia). So, it’s all eyes on the 6th of December Vienna meeting, because the devil is now in the detail and the cartel need to bring their A-game and go above and beyond or the market will fade this rally, and the bearish trend should continue in earnest.

Crude Oil IPE

A Reversal Of Fortune

As shown in the chart above, the reversal of fortune in Brent Crude has been relatively short and very sharp, with dead crosses forming between the 20- and 50-day EMA lines, the 50- and 200-day lines, and most recently, between the 20- and 200-day lines. Unsurprisingly, all three lines are still declining. The daily RSI 14 for Brent is below the oversold boundary of 30, though it’s bounced off the lows around 20 on three occasions in recent weeks. In truth, nothing is stopping it from testing lower once more. All in all, it's a pretty gloomy picture. 

Buying When The Cannon Roars 

It’s the volatility that has me interested as a trader. Sentiment and momentum have swung so far in one direction, traders should consider the possibility of swing in the other direction, in this case, from negative to positive. In my mind, all of the bad news is priced into Brent already. That’s not to say that the price can’t fall further - because it could. From here, the price should be more sensitive to good news than bad. Given the recent price action, it seems logical to assume that traders are likely to be short of oil and therefore vulnerable to a squeeze in the advent of good news. 

Technical Levels

The 23rd of November low of US$58.67, the 27th of October 2017 low of US$56.94 and the 13th of October low that same year of US$54.84 are all potential supports. A weekly close above the 23rd of November low would be a positive sign. Better still, would be a close above US$61.22 on the 26th of November high and US$61.51 the high point on the following day. On this occasion, however, any meaningful bounce in Brent will likely come on the back of macro catalysts and newsflow, rather than signals from the chart. 

That said, despite its recent price falls Brent Crude is not classified as the strongest bear trend within my model and would be back in bull trend if it recovered to $64 per barrel. Watch the newsflow and look out for sharp counter-trend rallies and a swing in sentiment if meaningful production cuts are agreed. 

 

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