Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Monday, crude oil lost 4.14% after Saudi Arabia said at the weekend it would not cut output to support the price of the commodity. In these circumstances, light crude declined sharply, but is still trading above the recent lows. Will we see a rebound from here in the coming days?

On Sunday, Saudi Arabia said it would not cut output to support the oil market even if non-OPEC nations did so. Additionally, Kuwaiti Oil Minister Ali al-Omair said OPEC did not need to cut production and would not hold an emergency meeting ahead of its next scheduled talks in June. In response to these comments, crude oil reversed and declined sharply, hitting an intraday low of $55.13. What’s next? (charts courtesy of http://stockcharts.com).

Looking at the daily chart, we see that although crude oil reversed and declined sharply, the overall situation hasn’t changed much as the commodity is still trading in a consolidation (marked with blue) between the 38.2% Fibonacci retracement (based on the entire Dec decline) and the recent lows. Taking this fact into account, we believe that our last commentary is up-to-date:

(…) crude oil is still trading in a narrow range between the 38.2% Fibonacci retracement (based on the entire Dec decline) the (…) support zone. Therefore, we think that as long as there is no successful breakout above this resistance (or breakdown under this support), opening any positions is not justified from the risk/reward perspective. The reason? When we take a closer look at the daily chart, we see that there was a bigger and sharp corrective upswing at the beginning of the month. Back then, although crude oil corrected over 38.2% of earlier downward move, oil bulls didn’t manage to push the commodity higher, which translated to a fresh 2014 low. Therefore, we think that a trend reversal (and an upward move to the initial upside target around $70) will be likely only if we see an upswing above $59.50, which won’t be followed by a fresh low. Until this time, another pullback and test of the recent low is likely.

Before we summarize today’s alert, we would like to draw your attention to the U.S. dollar – crude oil link. As you see on the daily chart, although the greenback extended gains in the recent days, hitting fresh 2014 highs, crude oil didn’t drop to a new low. Instead, the commodity has been trading in the consolidation, which may be the first sign of strength. Taking this important event into account, we can initially assume that even if the U.S. currency moves higher, it will not necessarily translate into lower values of crude oil.

How much more room to rally does the greenback have? Let’s take a closer look at the USD Index.

From this perspective, we see that the USD Index, which tracks the performance of the greenback against a basket of six major rivals, approached the 38.2% Fibonacci retracement (based on the entire 2002-2008 declines), which could pause (or even stop) further rally in the coming days. If this is the case, the U.S. dollar will correct the recent rally, making crude oil more attractive among investors holding other currencies, which will translate to higher prices of the commodity.

Summing up, although crude reversed and declined sharply, the overall situation in the commodity hasn’t changed much as light crude is trading in a narrow range. Nevertheless, if oil bulls manage to push light crude above the 38.2% Fibonacci retracement (based on the entire Dec decline), we’ll consider opening long positions. Until this time, no positions are justified from the risk/reward perspective.

Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment. We will keep you informed should anything change.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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