On Monday, crude oil closed higher for the third day in a row and gained 0.64%. Light crude rose after Reuters reported that exports from Libya had fallen to the lowest level in six weeks after operations at its western port of Zawia had been suspended at the weekend. Additionally, U.S. data showed that industrial production rose at the fastest pace in seven months in September, which boosted the demand outlook and pushed crude oil to its highest level since Oct. 23.
Please note that crude exports dropped to approximately 250,000 barrels per day over the weekend, from an overall capacity of 1.25 million barrels per day, which raised supply concerns and boosted the price of light crude, just like earlier this year.
Oil prices were also lifted by an improved demand outlook and the expectation for better refining margins after data showed U.S. industrial production recorded its largest increase in September.
Having discussed major factors which had an impact on the price of crude, let’s move on to the technical changes in the crude oil market (charts courtesy of http://stockcharts.com).
On Monday, we saw further improvement. Oil bulls pushed the price of light crude above the previously-broken lower border of the declining trend channel and broke above the 200-day moving average (only on an intraday basis). In this way, the price came back in the range of the declining trend channel, which is a first positive change in the short-term outlook. However, as long as crude oil remains below the 200-day moving average it seems that further increases are limited.
Quoting our previous Oil Trading Alert:
(…) Taking the above into account we should consider two scenarios. If oil bulls do not give up and (…) break above the 200-day moving average we will likely see further growth to around $101 per barrel. On the other hand, if the buyers show their weakness oil bears will likely trigger another corrective move and test the October low.
Crude oil still remains above a strong support zone based on the 50-week moving average, the previously-broken neck level of the reverse head and shoulders formation and the 61.8% Fibonacci retracement level based on the entire April-August rally.
Before we summarize, we want to focus on the XOI once again.
Yesterday, the oil stock index continued its rally and hit a fresh monthly high at 1,471. With this growth, oil stocks reached the 78.6% Fibonacci retracement level (close to 1,467) based on the entire May-October 2008 decline once again. If the breakout above this strong resistance is confirmed and the buyers push the XOI higher, we may see an increase to at least 1,480. If this resistance level is broken, the next target level will be around 1,560.
However, we should keep in mind that the RSI almost reached the 70 level. Additionally, when we take a closer look at the daily chart, we notice a negative divergence between the indicator and the XOI, which is a bearish sign. Therefore, we may see a corrective move in the near future. Please note that we saw similar price action several times in the previous months (marked with red arrows on the above chart).
The nearest support level is the bottom of the recent corrective move at 1,441. The next support lies at 1,428-1,430 and it is based on the May and September highs.
Summing up, light crude extended gains and came back in the range of the declining trend channel. In spite of this growth, it still remains below the 200-day moving average, which serves as resistance. It seems that as long as crude oil remains below it further increases are limited.
Very short-term outlook: mixed with bullish bias
Short-term outlook: bearish
MT outlook: mixed
LT outlook: bullish
Trading position (short-term): we do not suggest opening any positions yet. Taking into account the very short-term picture, the situation is still unclear.
Thank you.
Nadia Simmons
Sunshine Profits' Crude Oil Expert
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