Oil is trading now just above $100, which is broadly a 30% decrease since the highs posted recently on July 11.
The price action fell back below the symbolic level of $100 a barrel 2 days ago but rose yesterday after OPEC meeting in Vienna. The organization agreed to adapt quotas for a total production limit of 28.8 million barrels a day, which will lead to a supply reduction of 500,000 barrels a day. This announcement has been considered therefore slightly bullish by the market.
However the major trend in place remains bearish as high prices and slowing global economic growth have been reducing demand for fuels.
It appears obviously that the market is oversupplied and therefore prices should fall lower. The key area is likely to be $80/85. It has been a support zone for the price action in late 2007 and early 2008. If price breaks below $80, it will be an important concern for the OPEC that may decide then to reduce more significantly the daily production.
A combination of weak economic growth outlook and persistently high prices obviously has an impact on consumer behaviour and choices. High prices are still hurting while economic conditions and forecasts are not optimistic not only in the developed countries, but also in the developing countries.
Moreover, as the US Dollar is bouncing back against the board, it is also a river for lower oil prices. The correlation has been a successful trade for investment managers during the first half of the year (long Oil/short US Dollar), that’s why the deleveraging and positions closing has also impacted oil prices.
Technically the price should fall lower. The price action has retraced 50% of its bullish trend started in January 2007 and finished in July 2008 (between points A and b on the chart), however a further correction is probable as the technical indicators remain bearish. There has been a small rebound occurred during the second fortnight of August but without any real positive momentum generated.
As a result, the MACD triggered a new bearish signal as it crossed below its signal line. The 50-day Momentum indicator continues to fall and the RSI does not show yet an oversold configuration. The fact that prices fall on a regular basis with slight rebounds on intermediary support lines creates the conditions of a medium-term negative trend.
The immediate support is around $98/99 where it had been a previous high posted two times in November 2007 and January 2008. But the main targets are $90, which is the 61.8% Fibonacci retracement level, and the support line that was tested on points C, D and E, around $85.
Good Investing,
Gabriel
