Epic Tug-of-War in Crude Oil Futures | RJO Futures

April 21, 2017 11:25AM CDT

Oil futures have been at the center of a “tug of war” as market participants attempt to quantify production headlines.  Here in the States, the Baker Hughes rig count has been steadily increasing week-over-week as US producers continue to come online resulting from profitable production margins.  In the opposing corner, OPEC nations continue to discussion further production cuts in an effort to raise oil prices.  A tug-of-war scenario providing a proverbial “layup” for newspaper cartoonists, futures traders are seeing the scene play out before their eyes.  But who will win?  The historical OPEC powerhouse or the (relatively) new kid on the block, US oil producers?

A key variable central to this scenario is the actual “breakeven” point for US oil producers.  While amassing a weighted average of the hypothetical “breakeven” point at which US oil producers would be able to run a profitable drilling operation is beyond the scope of this article, many analysts have ventured to guess this level comes in around $50 per barrel.  Operating under this assumption, logic would say that so long as US producers can market their oil north of $50 per barrel, production will continue to be on the up and up here in the US, which has been validated in the trend of the Baker Hughes rig count.

OPEC’s initiative to cut back on production has been largely affective in raising oil prices over the past few months.  However, as previously mentioned, this uptick in price has allowed US producers to reenter the market, thus introducing a steadily increasing flow of supply.  The past few sessions have seen increased selling pressure coming into the market which begs the question: “Is the added US production finally hitting prices?”

Confirmation of this epic tug-of-war has played out on the chart dating back to June of last year.  The market has produced an increasingly tight range with a slight positive tone to it.  The upper end of the range seems to be defined by the area from 55.52 – 57.00.  Participants saw a rejection from initial resistance at 53.80, which was highlighted by a bearish divergence signal in the RSI, and the June futures now find themselves trading below the 20, 50, and 200 day SMA, as well as the all-important $50 per barrel level.

In light of the recent weakness in oil prices coupled with the seemingly endless rise in US rig counts, an argument could be made that oil prices are gearing up for a retest of the range-lows.  Technical support can be seen in the area from 47.71 down to 46.94.  Below here, the next level of potential support is at 44.56, which would represent a new relative swing low and could set the stage for a downside breakout from the current consolidation range.  If this scenario begins to play out, will US producers continue to ramp up production or will we finally see a decline in the Baker Hughes rig count?

Crude Light Daily Chart

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