Now that the steep sell-off is out of the way and a few of the weaker longs have been knocked out of the market, U.S. West Texas Intermediate and international-benchmark Brent crude may resume their rangebound trade over the near-term.
The reason for expecting a rangebound trade is because the OPEC-led production cuts should continue to keep supply relatively tight and concerns over lower demand due to the lingering trade dispute between the United States and China should keep a lid on prices.
Last week’s steep sell-off on May 23 may have been a one-time event and it’s looking more like it was triggered by a slew of sell stops under key technical levels. Although bearish news about weakening U.S. manufacturing PMI may have been the catalyst behind the selling, my experience tells me that new short-sellers aren’t likely to sell weakness and would prefer to sell a rally back into resistance.
I believe the sell stops were triggered under two levels, the 200-day moving average and a major 50% level. If this was the case then I believe the markets will retracement back to these levels and give traders the opportunity to short at more favorable levels, or allow the markets to continue to climb into a trading range.
For July WTI crude oil, the 50% level is $59.70 and the 200-day moving average is at $60.61. For August Brent crude oil, the key technical levels are $67.60 and $68.59. Somewhere between these levels, traders are going to decide whether to short the markets or let them become rangebound.
Although both WTI and Brent produced their biggest weekly losses of the year last week, the main takeaway for us is the sensitivity long traders showed to the report showing weaker-than-expected U.S. manufacturing PMI data.
The steep sell-off should serve as a warning as to what is likely to happen to crude oil prices if there is a global or domestic slowdown or recession. Any hint of weakening demand due to economic weakness will likely bring in the real short-sellers and this could plunge prices into the $40 range because I doubt that OPEC and its allies will continue to cut production to meet the lower demand.
On Friday, the U.S. Commodity Futures Trading Commission (CFTC) said money managers cut their net long U.S. crude futures and options positions in the week to May 21. Judging from the sell-off on May 23, it may not take much bad news to flip them to the short side.
This article was originally posted on FX Empire
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