Both crude oil contracts started the new week on the back foot earlier this morning. But as the session wore on, WTI prices managed to turn higher while Brent remained in the red. On the face of it, WTI’s rally did not make much sense, for after all there wasn’t any US data to cause prices to bounce. But on a closer inspection, the small recovery was not all too random after all – it was just a bit late. On Friday, Baker Hughes reported a surprisingly sharp decrease in US oil rig count after the decline had slowed down for the prior two weeks. Last week’s decline of 64 means the rig counts are now at their lowest level since April 2011, pointing to a marked cut back in oil production by around the middle of this year. But despite the sharp fall in the rig count, WTI actually closed Friday’s session sharply lower. That was only because the dollar’s rally had masked the underlying strength in oil. Today, the US currency has paused for breath and consequently WTI’s strength has become more apparent. In any event, I doubt this small kick back rally will last long for the market remains awashed with the black stuff in the short term. US inventories have been climbing higher in recent weeks despite the falls in rig counts and also the much weaker oil prices. Until we see a period of sharp destocking, WTI prices will likely remain under pressure in the near term.
WTI’s earlier bounce also looked technically driven after it found support from a short-term bullish trend line at $49.25. The corresponding rally has – for now anyway – come to a halt near support-turned-resistance level of $50.70. If the bears defend this level then WTI may eventually crack under pressure and take out the trend line, leading to some more follow-up technical selling towards and possibly beyond the next support at $48.00. However, if US oil breaks above the $50.70 resistance level then it may make a move towards the next resistance around $52.00 before deciding on its next move. Meanwhile the Brent contract is trading near the lower end of its recent range, near the $58.50 support level. A daily closing break below this area could lead to a potential drop towards the 38.2% Fibonacci retracement level at $56.15 or even the 50-day moving average at $55.10. Resistance meanwhile comes in around the psychological $60 handle.