In terms of crude oil the consensus view is for higher crude prices but as we noted in our report in March a corrective break could occur due to the bullish extreme – we did see prices fall back but now is it time to buy the dip or will we see more downside? Enclosed our view of the fundamentals, sentiment and technicals.
In terms of the market its never been more bullish commodities as we can see on the chart below which is BofA FMS data.
The data shows investors are holding their highest allocations ever in the commodity index. The last time these levels of optimism was reached oil was over $100 but the global economy is in worse shape than now than back then.
Investors are heavily bullish on the energy sector and crude oil the chart below shows how bullish they are in terms of energy-related companies – over the last 4 weeks we have seen huge inflows compared to other sectors.
The market view is that with the global economy re-opening demand will soar but we have a long way to go, to get to pre COVID levels as we can see in terms of the demand for US gasoline.
On the supply side, we have NO tightness with oil production high in fact, it’s near levels that were seen back in the 1970s and there is more than enough supply on tap to satisfy demand. Also we need to keep in mind crude oil movements are mostly speculative with well over 80% of movement caused by speculation and without speculators, the price of crude would hardly move. Speculators have pushed prices to far to the upside and we would expect to see further weakness in crude oil.
Speculators also bought crude oil due to a weak USD but the USD has started to firm up and we expect more strength ahead in terms of the USD which is another bearish fundamental for crude. The fact is a + 200% rise in crude oil since last March does not reflect the true supply and demand picture and we are now seeing some weakness in crude oil and expect more in the weeks ahead.
Crude Oil Technical Analysis Support and Resistance Levels to Watch
In terms of the key technical levels of support and resistance on the weekly chart below the key resistance level is $62.00 and the big levels of support are at $50.00 then $40.00. In terms of the daily chart we are in a choppy sideways channel and view crude as a sell back to resistance or if we breakout of the recent range we would expect strong follow through selling to major support levels.
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