Crude Oil Breaks Key Support

Only war is going to help the Middle-East oil and gas producing countries from economic collapse as Oil & Gas are the main stay of their economy. All thanks to an Islamic country like Saudi Arabia gambling on oil prices by producing and flooding the world oil markets with excess crude oil .These fools brought about their own doom and demise. Now with the collapse of Middle-east countries, the region will be fractured into thousands of mini states and will be in constant warfare and millions will die at the barrel of the gun or starvation. This prophecy was already fore told a thousand years ago, that a family with a thousand brother and sisters will rule a rock in the desert which will nourish them with black honey and they will bring about their doom by breaking the rock to get more black honey as the honey was not enough, Greed

Summary

Crude oil breaks key support at $48 and $47 per barrel.

The recent price trend shows both lower highs and lower lows.

Some analysts believe that the implied or explicit agreement to work together to prop up prices may be over.

In this crude oil update, we update some key factors that contribute to the price of crude oil in the short and medium term. Readers might recall that we had introduced our coverage of The United States Oil Fund (NYSEARCA:USO) with a bearish posture in early March, then switched to a bullish bias after crude rebounded solidly above a key trend support line. That support line has broken, which has opened up the potential for further downside. The four factors that we address in this article are summarized in the table below. We will be following the price action on USO with a bias toward selling what we perceive to be weak rallies.



The USO ETF closely follows the front-month WTI crude oil futures contract on NYMEX, since it holds the front-month futures contracts as its primary asset. USO can be useful for short-term trading positions, but is not always a great candidate for "buy and hold" investors, due to time decay created by the normal structure of the futures market. We covered that briefly in an article that can be accessed here. We have updated our indicators for USO investment, and the above table summarizes our current outlook.

Technicals

We believe that technical analysis on the continuous West Texas Intermediate Crude Oil futures contract is more relevant than technical analysis on USO. Therefore, while our charting below is on the oil futures contract traded on NYMEX, our trading positions are often on USO, which is very liquid and accessible. We review two charts below. On one look at the daily chart, we highlight a few items regarding the price of crude oil:

Crude oil tends to have rounded bottoms and rounded tops. Therefore, there is no need to try and catch this knife if price stabilizes here.
Crude has experienced four solid recoveries from the upward sloping support trendline since April 2016.
In the most recent move, crude oil held support near its 200 day SMA before breaking below trend support with authority both yesterday and today (May 4).
Lastly -- and, in our view, most importantly -- the price of crude has now set both a lower high and a lower low. If price closes below $47/bbl today, this will be a bad sign for crude oil bulls.

Geopolitics

In our most recent updates, we laid out our view that Saudi Aramco's planned initial public offering in 2018 should provide (direct and indirect) support to crude oil prices. In fact, many market analysts have been discussing a deal between OPEC and hedge funds for months (as shown below).

Nevertheless, the analyst above, among others, believe that the implied or explicit agreement to work together to prop up prices may be over, primarily due to OPEC member's lack of compliance to production targets. Some relevant recent tweets (in reverse order) are shown below.

Oil price will continue to respond to headlines from OPEC members, and we should expect that OPEC member nations will respond to the recent price decline with many headlines. Crude oil is one of those products that can respond to geopolitical headlines with force.

Currency and Refined Products

Crude oil has value due to the refined products that are produced from it: diesel and gasoline. Typically, the value of refined products increase as we head into the "summer driving season." Not so far this year.

Since Canada's GDP is heavily reliant on crude oil, the value of the Canadian dollar tends to move along with the price of crude oil, and vice versa. Over the past month, the value of the Canadian dollar has weakened considerably versus the U.S. dollar. Some commentators view the move in the CADUSD to be oversold, and we could therefore see a relief rally in both crude oil and in the CADUSD.

Below, we have graphed the price of crude oil (in candlesticks) versus the relative value of refined products (black line) and the CADUSD (blue line).

Supply and Demand Fundamentals

The U.S. remains at or near record highs for crude oil, gasoline and diesel fuel. In addition, anyone who follows this market knows that the shale oil producers can and will increase production in response to increases in price. Rig counts have risen for many weeks in a row.

We have attached a helpful summary of the current and historical supply and demand picture, which was produced by Ole Hansen, a commodity analyst with Saxo Bank.

The crude oil market has been oversupplied for many months, so the fact of oversupply is not the primary determinant for near-term price direction. In the short run, headlines and technical factors will dominate.

Thanks for any comments and feedback below. If you liked this article, please hit the follow button above.

Note: All charts above were taken from TradingView. Unless otherwise indicated, the tables were created by Viking Analytics.