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Is crude really in a ‘bull market’?

Yesterday saw crude oil make back almost the entire losses from the day before and both contracts are up again today, hovering near the highs from earlier in the week. These large daily price swings clearly suggest that emotionally-charged speculators are not too sure about oil's direction. On the one hand, there have been signs that suggest oil output in the US is about to decline meaningfully, with oil producers abandoning some exploration projects as highlighted by the significant falls in rig counts lately. On the other hand, the oil market is still excessively oversupplied and there is no guarantee that the falls in rig counts will necessarily translate into lower crude production. So far, most of the falls have been in the less-efficient vertical and directional rigs as opposed to the horizontal ones. The latter are extensively used in shale oil production and much more efficient. Until and unless these types of rigs also start falling significantly then the risks are that the oil surplus will remain in place for a lot longer than some currently expect. Specifically, there needs to be evidence of a generous drop in rig counts at the leading US shale regions of Bakken, Eagle Ford and Permian before one could conclude that the oil market will be more balanced this year. In the longer-term, prices are unlikely to rise significantly and remain elevated for if they did there is nothing to stop shale producers from ramping up drilling activity and production once again.

Nevertheless, oil prices appear to have formed a base for the time being. As they have now recovered more than 20% off their lows, they are, at least technically speaking, in a bull market. However despite the upsurge, prices have not even retraced to their extremely shallow 23.6% Fibonacci levels yet. For Brent, this Fibonacci level comes in around $61.80 while for WTI it is at $58.70. Thus the longer-term bearish trend for oil is by no means over just yet. Brent is currently holding above its 50-day moving average ($57.20) and trying to break above resistance at $58.50. A potential closing break above here could pave the way for that Fibonacci level or even the next key resistance at $63.00. There are several short-term support levels to watch but the key support is way down at $52.40, which was formerly resistance. Meanwhile WTI is testing resistance around $52.50. A closing break above here may pave the way for a move towards the Fibonacci levels shown on the chart.

Figure 1:

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Figure 2:

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