Last week has been a new period of decline for oil prices as they plunged below $60 a barrel. The crude oil future contract for delivery January 2009 is now trading around $54.
Oil prices are of course impacted by the ugly economic news and data which are likely to decrease further the global demand, but also because of the strengthening of the US Dollar, which is negatively correlated with commodities and especially oil products.
Despite the lower production decided by the OPEC recently (by 1.5 million of barrels per day), prices remain weak. Another action to decrease the daily production may be decided in the next meeting which will be held in Egypt on November 29, but it does not appear yet to be a sufficient event to stop the current bearish trend on the oil markets.
Technically, the current area is potentially a support zone for prices as they came back to precedent levels that most of traders and investors focus with attention. First, the level around 55 was the original point of the strong bullish trend generated in January 2007 (point A on the weekly chart). The price action totally corrected this bullish trend in 4 months between July and November this year (between points B and C). If the level of 54 holds, it might be the opportunity for a “double-bottom” pattern and eventually a rebound.
Second, the level of $50 is an important support line. Actually it’s a psychological level (as well as $100), which was the high posted in September 2001 and one year after in September 2002 (points D and E). This previous resistance was cleared in late 2002 and became a new support as it was the low posted in March 2003 (point F).
A break below $50 is unlikely on the short-term as oil prices are now clearly oversold. The weekly RSI has now declined in the oversold area. A bounce back out of this zone may be the signal for a potential rebound. The momentum is currently still negative as both the MACD and the technical Momentum indicators are oriented downward.
A further fall towards 50 would probably trigger massive buying interest. In this scenario, a retracement of the recent collapse would lead first prices toward $73, which is the first Fibonacci ratio.
