Oil may see a short-term recovery

OIL prices recently saw their steepest monthly decline since 2008, with leading benchmarks falling over 30 per cent from their peaks. Brent and WTI both fell over 20 per cent in November alone, closing around US$57.50 and US$49.41 per barrel respectively at month-end. The steepness of the decline caught many traders by surprise, with many pondering when prices would bottom out.

What triggered the fall?

A surge in global oil supply, coupled with renewed US sanctions on Iran and tepid global oil demand helped to reverse market sentiment. According to the Energy Information Administration, the US produced record-high levels of oil at 11.475 million barrels per day in September, causing US oil stockpiles to rise to a year high of 450.5 million barrels in November. Furthermore, the Organization of Petroleum Exporting Countries (Opec) maintained stubbornly high production levels at 33.11 million barrels per day in November, a mere 160,000 bpd decline from October's record high output, according to a recent Reuters survey.

The waning demand for oil added to the glut, strengthening the decline of oil prices. With oil sanctions on Iran delayed by the US, and economists warning of impending slower global GDP growth, the market seemingly saw little means of ridding oversupply, which could result in sustained low oil prices.

Will oil prices continue to fall?

At this point, crude oil has fallen into a two-year congestion zone between US$54.50 and US$42 created back in 2016 and 2017. Although currently experiencing bearish conditions with prices trading below both daily and four hourly declining 20, 50 and 100 simple moving averages, we shouldn't discount a possible rebound at this level. Seeing weekly chart RSI readings in oversold levels at the psychological support of US$50, in addition to prices breaking above the two-month downtrend channel line beginning in October, the market could be ready for a short-term recovery.

Bullish scenario

If prices sustain above the short-term support of US$52.20, this could indicate buyer interest. We expect any rally could extend into the major resistance of US$54.80. Sellers could come in at the first test of that resistance as the major trend is still down. However, further positive momentum could see prices headed for the US$58.95 medium-term target.

Bearish scenario

A break below the US$52.20 support could cause prices to retest the US$50 psychological support in the short-term. Further bearish momentum could drive prices down to the US$48 and US$46 supports, and eventually towards the US$43 long-term support at the bottom of the multi-year congestion zone.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.