On Tuesday, crude oil dropped below $99 per barrel after data showed that the U.S. economy added fewer than expected jobs in September. Disappointing U.S. jobs data and a build in crude stockpiles raised concerns about oil demand in the world's largest oil consumer and pushed the price of light crude to a new monthly low of $98.11. With this downward move light crude lost 1.40% and declined to its lowest level lowest in nearly four months.

Quoting our previous Oil Trading Alert:

(...) we clearly see that yesterday's build put a lot of pressure on the oil market and that surplus definitely weighed on prices. Taking the above into account, we can conclude that there are a lot of stocks of crude oil in the U.S. Therefore, fundamentally, the oil market is not so strong, but technically WTI could rebound today if the employment data is better than expected.

However, after the Department of Labor said the U.S. economy added just 148,000 jobs in September, well below expectations for an increase of 180,000, the price of light crude fell below $99 per barrel. The report disappointed investors and painted a picture of a U.S. economy still battling headwinds along its road to recovery, one that may demand less fuel and energy than once anticipated.

As mentioned earlier, the price of crude oil is largely dictated by the amount of supply in the U.S. at the moment. Therefore, data from the American Petroleum Institute showing crude stocks building at Cushing, Oklahoma, helped to trigger selling of crude oil. The API showed that stocks at the U.S. oil storage hub rose last week by 423,000 barrels, the second weekly increase, while U.S. crude inventories rose by 3 million barrels.

Today, investors are waiting for the latest weekly report from the U.S. Energy Information Administration (EIA), which will return to its normal schedule this week after the U.S. government resumed operations following its shutdown.

Once we know these major factors which had an impact on light crude, let’s move on to the technical changes in the crude oil market. Yesterday, oil bears showed their claws once again and pushed the price of crude oil to the 50% Fibonacci retracement level. The buyers didn’t manage to stop declines at this level, which resulted in further deterioration. In this way, the price dropped below the lower border of the declining trend channel (based on the Sept. 3 and Sept. 30 lows).

At this point, we should consider whether or not to open speculative short positions.

On one hand, the breakdown below the lower border of the declining trend channel is a strong bearish signal, which may result in further declines. According to theory, the price target for this formation will be slightly above $91 per barrel. However, on the other hand, the breakdown is unconfirmed at the moment. Additionally, we should keep in mind the medium-term picture. Yesterday, light crude extended declines and it almost reached a strong support zone based on the 50-week moving average (currently close to $97) and the previously-broken neck level of the reverse head and shoulders formation.

Please note that yesterday light crude dropped below the 200-day moving average for the first time since June, but we saw similar drops at the beginning and end of May. Back then, in both cases, the breakdown was invalidated in the following days and crude oil rebounded. Therefore, we may see similar price action in the coming days.

Before we summarize, we want to focus on the XOI once again.

On Tuesday, oil stocks climbed once again and hit their new monthly high at 1,470. In this way, the XOI broke above the 78.6% (close to 1,467) Fibonacci retracement level based on the entire May-October 2008 decline, but the breakout in unconfirmed at the moment. Please note that if the buyers don’t give up and we see the confirmation of the breakout, the rally will likely continue. In this case, the next target level will be around 1,560.

Summing up, light crude dropped below the lower border of the declining trend channel, but the breakdown is not confirmed at the moment.

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

Trading position (short-term): Although we are considering opening speculative short positions, we do not suggest opening them just yet. Taking into account the medium-term picture, the situation is still unclear.

Thank you.

Nadia Simmons
Sunshine Profits' Crude Oil Expert
Oil Investment Updates
Oil Trading Alerts