So far this year, the oil market has had to navigate a raft of threats including rising tensions between Iran and the West, oil tankers being seized in the world's busiest shipping lane - the Strait of Hormuz - and insurance premiums surging higher for oil shippers in the region. Many analysts were calling for oil to surge beyond $100 per barrel. The fact oil has stayed around the $57 price level points to another huge underlying problem in the market. A problem that could cause a 30% drop in oil prices.
In this article, we discuss the underlying problem facing the oil market and the possible trading opportunities that could lie ahead for well-informed traders. Let's get started!
Why have oil prices stagnated?
After all of this year's events, many analysts believed oil should have been trading far beyond the $100 price level as supply routes come under threat. However, there is an underlying problem facing the oil market right now - a slowing world economy. As global economies continue to stagnate the need for oil falls. But what is the proof that global economies are slowing?
On Thursday 25 July, European Central Bank president Mario Draghi announced the central bank is willing to cut interest rates further and explore some of the measures used to bail out the bloc after the financial recession such as quantitative easing. All of this is in response to a struggling manufacturing sector and slow growth. In effect, Draghi sounded the alarm bell.
To make matters worse for the oil market, the rise of the US shale oil industry means that many traders expect the oil market to be in surplus this year and next, even though the market's supply has taken hits from Iran and Venezuela sanctions and OPEC's effort with Russia to cut production.
While things are certainly leaning towards the bearish side for oil markets, a serious disruption in the Gulf could still help oil markets push higher. What do the technical charts say? Let's take a look.
How to Trade WTI Oil
With Admiral Markets you can trade on two types of oil markets: Brent Crude Oil (BRENT) and West Texas Intermediate Oil (WTI). Traders can speculate on the price of these oil markets by using a product called CFD, or Contract for Difference. Essentially, this enables traders to go long and short on a market, such as oil.
Below is the long-term price chart of WTI Oil CFD:
(Click on image to enlarge)
Source: Admiral Markets MetaTrader 4, WTI, Monthly - Data range: from Dec 4, 2016, to July 25, 2019, accessed on July 25, 2019, at 9:24 pm BST. - Please note: Past performance is not a reliable indicator of future results.
In the long-term price chart of WTI Oil above, it is clear to see the blue resistance lines helping to keep oil prices down. Resistance lines such as these are used by traders to not only help in identifying the trend but also for areas to trade from. However, with the information on the chart so far, all we can deduce is that the price of WTI Oil is weak. Let's explore the lower timeframe to gather more information.
(Click on image to enlarge)
Source: Admiral Markets MetaTrader 4, WTI, Weekly - Data range: from Dec 4, 2016, to July 25, 2019, accessed on July 25, 2019, at 9:24 pm BST. - Please note: Past performance is not a reliable indicator of future results.
The weekly price chart above of WTI Oil shows additional resistance lines all converging around the same area, highlighted by the yellow box. Buyers tried to break through this area while tensions escalated between Iran and the West but struggled to get any higher. In fact, sellers managed to take control of the market and pushed prices lower to form a well-know price action pattern called a bearish engulfing candle.
A bearish engulfing candle is a candle which starts of bullish by pushing higher beyond the candle's previous high but then failing to hold at these levels and falling all the way back down to break below the previous candle's low. It's a strong reversal sign to the downside, suggesting lower prices in WTI Oil. However, so far - at the time of writing - there has not been any continuation to the downside. If there is, however, just how far could it go?
(Click on image to enlarge)
Source: Admiral Markets MetaTrader 4, WTI, Weekly - Data range: from Dec 4, 2016, to July 25, 2019, accessed on July 25, 2019, at 9:32 pm BST. - Please note: Past performance is not a reliable indicator of future results.
If the price of WTI oil does indeed fall, there is no major support level until the $42.24 horizontal support line, as shown in the chart above. This represents a near 30% drop from the high of July. Currently, there are major forces keeping oil markets higher and lower. Eventually, one force will prevail. In this heightened period volatility risk management, such as using stop losses, is essential.
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