Fundamental Forecast for Crude Oil: Bearish

CRUDE OIL TALKING POINTS

Oil enters a bear market as the Organization of the Petroleum Exporting Countries (OPEC) shift gears to a ‘produce as much you can mode,’ and the current environment is likely to keep crude prices under pressure as the bearish momentum appears to be gathering pace.

Oil prices have tumbled more than 20% from the 2018-high ($76.88) as OPEC and its allies respond to the weakening outlook for global demand, and the group may continue to boost output throughout the remainder of 2018 even as U.S. crude production climbs to a record-high.

Fresh figures from the U.S. Department of Energy (DoE) show field production widening to 11.8K b/d from 11.2K b/d in the week ending October 26, but the updates continue to reflect waning demand for crude as inventories jump another 5783K in the week ending November 2.

The slowdown in emerging market economies paired with the trade war between the U.S. and China, the two largest consumers of oil, is likely to keep OPEC and its allies on track to foster lower energy prices especially as the Monthly Oil Market Report (MOMR) projects consumption in 2019. In turn, crude prices remain vulnerable ahead of the next OPEC meeting on December 6, and the recent pickup in volatility appears to be fueling a broader change in market behavior amid the ongoing shift in retail interest.

The IG Client Sentiment Report still shows retail sentiment near extremes as 82.6% of traders are net-long crude, with the ratio of traders long to short at 4.73 to 1.In fact, traders have been net-long since October 11 when oil traded near the $71.00 mark even though price has moved 17.1% lower since then.The number of traders net-long is 0.5% higher than yesterday and 26.6% higher from last week, while the number of traders net-short is 10.5% higher than yesterday and 6.4% higher from last week.

The ongoing accumulation in net-long interest provides a contrarian view to crowd sentiment as traders attempt to fade the weakness in oil, and the broader outlook warns a further decline as crude prices snap the upward trend from earlier this year. Moreover, the stickiness in the Relative Strength Index (RSI) warns of further losses as the oscillator sits in oversold territory for the first time since 2017 and continues to track the bearish formation carried over from the previous month.

CRUDE OIL DAILY CHART

Downside targets remain on the radar for crude as it continues to carve a series of lower highs & lows, with oil marking the longest string of losses on record as it declines for 10 consecutive sessions. In turn, the rebound from the 2018-low ($58.11) may continue to unravel, with a break/close below the $59.00 (61.8% retracement) to $59.30 (78.6% expansion) region raising the risk for a move towards the $55.00 (61.8% expansion) handle. Will need to keep a close eye on the RSI as it sits in oversold territory, with the oscillator at risk of flashing a bullish trigger once it snaps the bearish formation and climbs back above 30.