Demand to drive WTI crude moves with supply-side now accounted for

• The seeds for Monday’s crude oil rout were sown last week
• WTI has fallen through the key 200-week moving average
• Demand considerations may determine crude’s near-term price performance, unless geopolitics flares again

Last week’s candle on the WTI crude chart provided an obvious signal on directional risks that came to the fore on Monday, combining with weak economic data out of the United States and belated surprise that OPEC+ will boost production later this year to send the price hurtling to lows not seen since February.

Downside risks were obvious, in hindsight

I should have heeded the warning but chose to overlook it, instead focusing on the bullish price action in the past few months whenever WTI dipped below $76.80. The idea worked initially but unraveled just as fast. In hindsight, I should have been more patient. Harry Hindsight is the best trader for a reason.

Now that crude has gone splat, the question is will the break extend or will we see another rapid reversal, mirroring the price action seen on previous occasions whenever the price has fallen through the 200-week moving average since early 2023? On 14 consecutive occasions WTI has tested or broken the level without ever closing below it, making the price action over the next few days important from a psychological perspective.

Crude busts key level – now what?

While recent history suggests a bounce is likely, having only just received the OPEC+ update on Sunday, the supply side of the equation has largely been accounted for in the near-term in the absence of a significant escalation in geopolitical tensions in the Middle East or some form of black swan event.

Never say never on either front, it points to demand being far more influential on the price in the coming days, especially in the United States. While the initial downside flush was likely exacerbated by stop-loss selling in the handover between Europe and North America, the fact the price continued to dribble lower without any bounce may reflect increased concern about economic growth in the US rolling over. As the largest consumer of crude oil globally, any signs of weakness there will likely amplify downside risks for crude.

Along with US inventory data from the EIA later in the week, keep a close eye on Wednesday’s US services PMI survey and Friday’s nonfarm payrolls report, because if they ratchet up the growth slowdown concerns, crude will likely struggle.

Searching for a bottoming pattern 

Looking at WTI on the daily, there’s not a lot standing between where the price sits now and $71.44, a level the price bounced strongly off in early February before embarking on a sizeable rally higher. With RSI breaking its tepid uptrend but not yet oversold, and MACD also triggering a bearish signal, there’s not a lot going for crude other than its now cheaper than it was.

On the topside, it closed at $74 on Monday, a level it did some work around earlier this year. That’s one potential level to build trades around. While selling here targeting a move to $71.44 is one option, allowing for a stop to be put above $74 for protection, having fallen so far already, I’m more inclined to look for a bottoming pattern accompanied by sizeable patterns given relative risk-reward. Until that eventuates, I’m staying on the sidelines.

-- Written by David Scutt

Follow David on Twitter @scutty