Brent crude oil price: technical bias turns further negative after 20% drop

Brent's price slid again yesterday and is now down more than 20% from its recent April peak above $75, breaching an important mid-term support level in the process as demand side worries overcome supply side shocks to keep the energy commodity’s price close to the lows.

Worsening trade war leads to slowing demand

On the demand side, a worsening trade war is causing demand for oil to plummet not just on an expected reduction in global growth rates as turbulence in international trade spirals out of control, but also on China’s currency devaluation that sent the yuan tumbling against the greenback. That sent commodity prices plummeting, as a falling currency results in reduced purchasing power, and a real threat to commodity demand given China’s massive consumption of inputs. And it isn’t just the short-term outlook either, as the mid- to long-term growth outlook as witnessed in the bond market with long-term yields plummeting (and for some) into negative territory remains worrying to say the least.

And then there’s competition from alternative energy sources, with stronger emissions controls forcing car companies into investing and introducing a heavy lineup of electric cars, as both energy and transportation grids evolve in a shift towards less reliance on oil in the coming years.

Oil staves off heavier falls due to supply side factors

Bearish news for oil then, yet it has managed to stave off heavier declines due to supply side factors. Organisation of Petroleum Exporting Countries plus Russia and others (OPEC+) members’ agreement to keep oil output cuts in place in the hopes of reviving oil prices with their budget commitments rising, geopolitical tensions failing to subside both in the Middle East and in Latin America with the recent US asset freeze and sanctions on oil producer Venezuela, US inventories declining following yesterday’s successive API deficit – this time to the tune of 3.4 millon and ahead of Energy Information Administration's (EIA’s) more encompassing estimate later today expected to show a similar deficit, and Baker Hughes’ US oil rig count registering yet another successive decline to 770 from the week before’s 776 reading.

All of these supply factors threaten continuity within the supply market, yet there is one wild card on this front: a worsening trade war that attempts to isolate China could push them to start importing Iranian oil again (or is already doing so according to the latest accusations and is set to up that figure). That would mean millions of barrels of previously sanctioned and untouched oil would now flood the system, and put oil bears in full control with little in the way to stop them as both falling demand and rising supply keep the pressure on oil prices.

How to trade oil

As it stands, the technical overview is an initialising bear trend, and hence conformist technical strategies are selling the first resistance level of 59.6 after a reversal, waiting for any upside movement to die down first and initiate the sell after it drops below the first resistance with the stop loss (S/L on the table) mentioned. If follow through picks up, selling at the first support level anticipating a further breakdown is also another option, though if the breakdown isn’t significant consider limited profit-taking. Contrarian traders can consider buying the first support level at the stop loss mentioned in the table.