U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower on Tuesday after the long holiday week-end. The price action suggests investors are waiting for a catalyst to drive the next move. The price action since Thursday’s steep sell-off has also been supporting my argument that most of the selling on May 23 was related to sell stops under key support areas.
For months the main catalysts driving crude oil prices higher have been the OPEC-led supply cuts and the U.S. sanctions against Iran and Venezuela. It’s safe to say that the latter are likely to stay in place and the former could actually be extended beyond its June deadline when OPEC and its allies meet at the end of June.
I see no problems with supply cuts at this time so the somewhat bullish tone should remain intact. The problem isn’t with tight supply anyway, it’s with rising U.S. production and stockpiles. It’s with the possibility of lower demand if the U.S.-China trade war escalates to the point where it leads to a global economic slowdown.
Furthermore, the Saudi’s may be willing to increase supply if there is a shortage of crude oil and prices jump, but I don’t expect OPEC and its allies, especially Russia to cut production further to meet a potential drop in demand.
The first sign of worry for crude oil bulls emerged last week on May 23 when the U.S. reported weaker-than-expected manufacturing PMI data. The second sign could emerge on Thursday when the U.S. releases a preliminary report on Gross Domestic Product (GDP). I know that I’ve said in the past that the data is stale and doesn’t have much of an impact on oil prices most of the time. However, this time it’s going to be different because the data has been collected before the latest round of tariffs is set to take place on June 1.
If the GDP report comes in below the 3.1% forecast then crude oil could break sharply again since this will likely mean that further weakness is coming. Furthermore, the report comes out before the weekly U.S. Energy Information Administration’s inventories report. If this shows another huge build then look for further pressure.
Finally, on May 24, the Commodity Futures Trading Commission (CFTC) said that the major players reduced their net long crude oil positions during the week-ending May 21. If they flip to net-short in the next report then look out to the downside. My biggest fear for longs at this time is that the hedge and commodity funds exited last week when the 200-day moving average was violated. If this is the case then they are likely to trade against this level this week. If this indicator becomes resistance then this will build a strong case for lower prices.
This article was originally posted on FX Empire
More From FXEMPIRE:
- DASH Technical Analysis – Support Levels in Play –29/05/19
- GBP/USD Trend Line Break Provides Additional Momentum
- The U.S – China Trade War Flare Up and Rare Earth
- EUR/USD Daily Forecast – Fiber Bulls Buckle-Up Ahead of German Unemployment Figures
- GBP/USD Daily Forecast – Brexit Chaos Continuing to Grapple Cable
- All in on the Fixed Income Juggernaut