Crude could fall even lower without OPEC intervention

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• Oil prices remain under pressure despite receding banking fears
• Major technical breakdown suggests more losses could be on the way
• Will the OPEC come to the rescue?

After falling by 8% at one point, crude oil prices managed to bounce back from their worst levels on Wednesday along with everything else. The rebound came on the back of news the Swiss National Bank offered a $54 billion lifeline to Credit Suisse. The move has helped calm fears of a financial crisis in Europe. But there wasn’t much immediate follow-through in the markets this morning ahead of the European Central Bank decision. Crude oil also turned lower. Risks, therefore, continue to remain to the downside for oil prices.

Oil prices have been weighed down by at least three major factors in recent days: 1) general risk-off sentiment, 2) weaker demand projections for oil and 3) technical selling.

Given that prices had been stuck inside a corridor for a long time – since early December to be exact – a major move was going to follow. The fact that we have now had a bearish fundamental trigger – a sharp rise in financial stability risks – to move prices outside of their ranges to the downside, meant that technical traders have also helped to add pressure on prices by selling oil futures short to take advantage of the momentum.

The three-month consolidation has been resolved by prices moving and closing below the support level of the sideways channel. This should keep the “sell-the-rallies” trade intact until something changes fundamentally.

The impact of very high levels of inflation over the past couple of years has been hurting consumption, while the significant interest rate tightening by central banks have further reduced consumer and business buying power. Indeed, the International Energy Agency is forecasting that global oil supply will “comfortably” exceed demand in the first half of this year. The IEA reported that commercial oil stocks in developed OECD countries hit an 18-month high. Oil prices also remain weighed down by higher-than-expected inventories. The EIA, meanwhile, posted a 1.6-million-barrel rise in US crude stockpiles last week, which was more than forecast.

So, all this begs the question: will the OPEC step in to save oil prices again by cutting its production?

The balls in their court now, but for now, thanks to the big breakdown, the path of least resistance is clearly to the downside for oil. Granted, we might see an oversold bounce in prices soon. But until something changes fundamentally to create a higher high for oil, we would continue to favour selling into resistance than fading the dips.

For Brent, the next potential downside target could be $70.00. Stop-loss orders of many bullish traders would now be resting below Wednesday’s low at $71.36. If they get tripped, which we think is likely, the next stop could well be that $70.00 mark. That’s not to say oil cannot go much lower than that. But that’s our main downside target in the short-term outlook.

On the upside, key resistance is seen between 75.00 to 76.60, an area which was previously support. Bullish traders will want to see oil go back above this area to regain control again.

-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R