Oil Market Outlook Week #48 – Time to Trade the range ? for TVC:USOIL by Lorenzo13

The Oil market after rejecting the end of Q3 2023 Highs around the 90 to 95$ range has suffered in the fourth quarter of the year.

The price of USOIL mimicking the one of the Western Texas Intermediate has closed week 47 with a price of $75.13.

Here is a brief breakdown of the recent fundamental changes & news that affected he market and their reflections in the price action seen on the daily graph.

1. Under-supply zone

The strong rejection seen in the month of October is synonym of prices that offer high incentives to both the extraction and refining industries that compose the supply-chain of petroleum products, these prices stimulate these physical assets to be run at full capacity as to minimize the ratio of variable costs to revenues generated.

Additionally, the spreads with alternative energy sources are contracted enough to enable for discretionary blending to be seen in alternative fuels industries, discretionary blending is the portion of the industry that blends and refines bio fuels only when its product can be sold competitively in the market versus traditional energy sources such as oil of course.

Moreover the inverse structure that was present in the Brent market signaling a lack of stocks at hand of crude brent oil was brought back to a quasi flat curve by substitution of Brent with American oil as reflected in the convergence between the two front months in Brent (coming from an inverse to flat) and in WTI futures (coming from a carry to flat).

2. Strong Technical Signal

October was also particularly important in terms of fundamentals in the market. Sentiment improved drastically as OPEC even amid the war in the middle-east is seemingly unable to effectively manipulate oil prices by way of cutting supply, very similarly to how Central banks drive economic policy by cutting or raising Interest rates.

This sentiment is clearly reflected in the price action as we see a fast triple cross in the daily EMAs (10; 20; 100) indicating a strong trend reversal.

3. Failed OPEC meeting on supply cuts

During the month of November OPEC was bound to meet to announce new supply cuts. However, this meeting never materialized, in fact it was completely cancelled, and no new supply cuts were announced. Market talks indicate that the middle-east region is maintaining current supply of oil to accumulate cash flow and further buy sovereign debt in the international markets amid worldwide geopolitical concerns.

This strong fundamental signal was perceived strongly by the market where investors pushed the price lower, breaking and consolidating below the $80 per barrel zone.

An important technical and fundamental victory for the bears.

MARKET OUTLOOK WEEK 48

4. Technical support & price discovery level

Positioning in the market will be key moving forward towards the end of the year.

The 72 to 68 $ range is an important technical support were demand for oil and paper products such as OTC forward contracts on oil deliveries are quite popular and offer an important level of price testing.

The approach the price action will have to this range in my opinion will be key to understanding the orderflow and sentiment driving the market.

From this range we will understand if the market is bound to range between the 80-85$ and 60-70$ range, in such case our approach to the market will be considerably different than if the market decides to push lower to test sanction’s price levels around the 60-65$ zone.

5. OPEC oversupply & Strong Western Demand

In fact the 60$ mark represent a very important oversupply zone for OPEC+ that would be obliged to further cut its supply of oil to preserve its main industry’s margins and at the same time it represents an extremely high demand zone from the EU specifically but also the US as it is the level at which Black sea and Russian oil is admissible for trade in the West, given the winter approaching it would also be the level at which western countries would decide to stock up for the season. In order to understand that a study of the futures curve would be appropriate.

MARKET APPROACH

We would approach the markets only in the eventuality of non-extreme volatility move, the extreme volatility move clearly potentially happening to the downside does not represent a sensible trade opportunity for us as entering and exiting such trade at the correct time would be extremely difficult in a market that below $70 could enter an extreme demand zone that would immediately push the prices higher again and further contribute to volatility.

On the other hand, in the eventuality of further news from OPEC intentions to cut supply, stocks drawdown potential or China’s economy ramping up production could lead the price to be bound in this 70 to 85 dollar range as illustrated by the top two potential scenarios drawn on the graph.

Given logical price action following some fundamental scenario, and combined with candlesticks patterns to optimize entries we could be looking at two potential trades within the range.

– Short position @ 79.5 with stoploss above 83.75$ with a price target near 71$ offering a larger than 1:2 risk-to-reward ratio

– Long position entered in the range 70-71.5$ with price target 79.5 with stoploss around 66.5$ offering a higher than 1:2 risk-to-reward ratio

Dear all,

I would like to remind you that this is not a financial advice in any way shape or form.

It is my opinion and my opinion only published to entertainment and educational purposes.

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