On Monday, crude oil lost 0.48% and dropped to a new monthly low at $101.05 as the prospect of a U.S. government shutdown could crimp oil demand. However, light crude erased most of the losses late in the day and closed at $102.29 per barrel. In the previous month crude oil lost 5.08% as many of bull factors have been removed from the market. Crude oil supply has improved, with Libya ramping up output while tensions over Syria and Iran eased. It is the first monthly loss since May.
It’s worth noting that the shutdown of the government would result in a decrease in demand for oil in the world's top oil consumer, which would likely weigh on prices. It would force hundreds of thousands of U.S. government employees across the country to stay home without pay.
Investors are looking ahead to U.S. oil inventories data on Wednesday. The U.S. Energy Information Administration (EIA) said it has enough resources to operate approximately through Oct 11 in the event of a government shutdown.
Once we know this, let’s focus on the technical changes in the crude oil market. Yesterday, we saw another move down, which took the price of crude oil not only below the August low, but also below the 38.2% Fibonacci retracement level and resulted in a new monthly low at $101.05. Despite this drop, we saw a pullback, which erased most of the losses late in the day. With this move light crude came back above the previously-broken 38.2% Fibonacci retracement level.
Please note that we have a confirmed breakdown below the August low in terms of closing prices. It seems that the only thing supporting the price of oil at this time is the 38.2% Fibonacci retracement - once this level is taken out, futher declines will become quite likely.
If this happens, the next support zone will be slightly below $100 per barrel, where the 50% Fibonacci retracement level intersects with the June high and the long-term declining support line based on the May 2011 and February 2012 highs.
Summing up, although there was a breakdown on an intradya basis below the 38.2% Fibonacci retracement level, the price of light crude rebounded and still remains above ths level.
Very short-term outlook: bearish
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish
Trading position (short-term): We do not suggest opening short positions at the moment. Although the situation is still bearish on a very short-term basis, the trade looks risky because of the strong support created by the 38.2% Fibonacci retracement level. We do not suggest opening long positions either, because there has been no breakout above the medium-term support/resistance line and the price of crude oil may test the strength of the previously mentioned strong support.
Thank you,
Nadia Simmons
