Oil Price Still Vulnerable amid Failure to Defend Monthly Opening Range

Oil Price Talking Points

The price of oil has gapped lower for the third time in November despite an unexpected decline in US inventories, and recent price action raises the scope for a larger correction in crude as it fails to defend the opening range for November.

Oil Price Still Vulnerable amid Failure to Defend Monthly Opening Range

The price of oil slips to a fresh monthly low ($76.44) as the US President Joe Biden plans to work with China ‘to address global energy supplies,’ and crude may face a larger pullback over the remainder of the month as it trades below the 50-Day SMA ($78.58) for the first time since September.

It remains to be seen if the Organization of Petroleum Exporting Countries (OPEC) and its allies will adjust the output schedule for 2022 as the group plans to “adjust upward the monthly overall production by 0.4 mb/d for the month of December,” but more of the same from OPEC+ may keep the price of oil afloat as the most recent Monthly Oil Market Report (MOMR) highlights that “world total demand in 2022 is now estimated to reach 100.6 mb/d, around 0.5 mb/d above 2019 levels.”

As a result, indications of stronger demand may push OPEC and its allies to boost production at a faster pace especially as US inventories unexpectedly contract in the week ending November 12, with stockpiles narrowing 2.101M versus forecasts for a 1.398M rise.

In turn, the price of oil may face a larger correction ahead of the next OPEC and non-OPEC Ministerial Meeting on December 2 as the US and China look to utilize strategic reverses, but current market conditions may act as a backstop for crude amid the subdued recovery in US output.

A deeper look at the figures from the Energy Information Administration shows weekly field product of crude slipping to 11,400K from 11,500K in the week ending November 5, and the price of oil may continue to reflect a bullish trend over the remainder of the year as indication of robust demand are met with signs of limited supply.

With that said, the recent weakness in the price of oil may turn out to be a correction in the broader trend as OPEC and its allies are on a preset course, but recent price action raises the scope for a larger correction in crude as it fails to defend the opening range for November.

Oil Price Daily Chart

Source: Trading View

• Keep in mind, the price of oil cleared the July high ($76.98) after defending the May low ($61.56), with the 50-Day SMA ($78.58) establishing a positive slope during the same period as crude broke out of the descending channel from earlier this year.
• As a result, the rally from the August low ($61.74) pushed the Relative Strength Index (RSI) above 70 for the first time since July, but crude reversed ahead of the October 2014 high ($92.96) as the oscillator fell back from overbought territory to indicate a textbook sell signal.
• At the same time, the failed attempts to test last month’s high ($85.41) has generate price gaps in crude as it struggled to hold above the $84.20 (78.6% expansion) region, withthe price of oil trading below the 50-Day SMA ($78.58) for the first time since September after closing below the `
• Need a close below the former-resistance zone around $76.90 (50% retracement) to $77.30 (78.6% expansion) to open up the $74.00 (61.8% expansion) to $74.40 (50% expansion) region, with the next area of interest coming in around $70.40 (38.2% expansion) to $71.70 (50% expansion).
• However, crude may attempt to fill the price gap from earlier this week if it fails to close below the former-resistance zone around $76.90 (50% retracement) to $77.30 (78.6% expansion), with a close above the $78.50 (61.8% expansion) to $78.80 (50% retracement) region bringing the $84.20 (78.6% expansion) area back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong