Oil: the lost positive link, Oil Market Analysis: WTI oil prices have fallen in four of the last five sessions, with bearish pressure intensifying near $78. The breakdown in the positive correlation with equity indices, coupled with weak drilling activity and historical highs in gold, marks a shift in the oil market. Technical factors suggest that the 200-week moving average could become a resistance level, with potential for a pullback to $70 by month-end. Explore the latest trends and technical insights in the oil market.
Oil: the lost positive link
The cost of a barrel of WTI has fallen four out of the last five sessions, underlining the dominance of
the bears. Selling is intensifying as the price rises above $78, which is close to important technical
levels.
Last week, oil failed to maintain the positive momentum of the beginning of the month and fell due to
active selling. The positive correlation between oil and equity indices broke down, with oil falling while
equities posted their strongest gains in months. This was accompanied by a weakening dollar and
historic highs in gold, the traditional companions of an oil bull market.
Drilling activity remains weak, with the oil rig count falling from 485 to 483 last week, and including
natural gas, from 588 to 586. Oil supply fell from a record 13.4 million bpd to a more familiar 13.3
million bpd. Producers are maintaining maximum output with historically low drilling activity, more
likely due to a reluctance to invest in production expansion rather than actively increased efficiency.
Commercial crude oil inventories are 2% lower than a year ago, which is within the normal range of
fluctuations and has no visible impact on prices. Buying continues in the strategic reserve, which is up
8.5% from its lows of just over a year ago but remains 42% below its four-year low. At the current
pace of buying, it would take almost ten years to bring the strategic reserve back to its early July 2020
level.
Subdued upstream investment, reserve replenishment and increased buying in related markets have
failed to turn the tide against oil. Technical factors continue to dominate. At the beginning of last
week, oil was above its 200-week moving average. At a high of $78.7, the price approached the 50-
week moving average ($79.1). However, the weekly close was negative, and the decline continued
Monday.
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The 200-week moving average, which has been a strong support level for the past three years, now
has a high probability of becoming serious resistance. At the end of July, oil broke out of the
consolidation trend that had been forming since April 2022. An unsuccessful attempt to move higher
could intensify selling and become an indicator of a reversal in the long-term trend.
In the short term, we are watching the bearish corridor that has been in place since April. Within this
trend, a move to the lower boundary suggests a pullback to $70 by the end of the month.
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