Crude oil is in correction territory, down a little more than 10 percent since its most recent high in late January. And while it did catch a bit of relief on Monday, settling modestly higher on the session, I wouldn’t buy any short-term strength here. In fact, I think we have further to fall. My downside target is $55 per barrel; I believe at that level the supply/demand equilibrium would be optimal.
Crude was trading just below $60 per barrel on Monday and now has seen a three day rally back above the 50-day MA. The main drivers for this strength are the weakening dollar, a rebound in equities and OPEC’s compliance in maintaining its 1.8 million-barrel-per-day production cut. However, I believe this is nothing more than a temporary recovery. Anticipated interest rate hikes this year will help provide underlying support to the dollar, which will in turn place pressure on oil. Furthermore, the recent weakness in stocks is concerning, and OPEC’s output cut compliance is a wild card at this point.
The bigger picture
Here’s the big problem with oil. The commodity’s fundamentals simply have too many cracks in the foundation to support higher prices. U.S. production continues to grow, surpassing 10.25 million barrels, and I expect another jump in rig counts this week. Last week, we saw an increase of 26 oil rigs, to 791 — the highest level since 2015. One result from increased production could be a series of weekly inventory builds from the Department of Energy, and we could see a massive unwinding in speculative positioning, currently near the highest levels since 2006.
Crude Oil Apr ’18 Daily Chart