The WTI Crude Oil market rallied slightly during the trading session on Tuesday, reaching towards the $35 level. That is roughly where the gap begins, and as a result it should not be a huge surprise to see that we did struggle to get above there. That being said, gaps do generally get filled, and it’s likely as a result there will be a short-term pop to the upside. Ultimately, this is a move that could go as high as $42, where the gap started. Nonetheless, even if we do get up to that level it’s very likely that the sellers will jump in and start pushing downward.
With Saudi Arabia kicking off a price war with the North American shale producers and Russia, this has cratered the oil market as Saudi is going to flood the market with extra supply. That being said, the question then becomes whether or not they will continue to do so in a world that has very little in the way of demand. In other words, this was a market that was going to continue going lower regardless of what they did and therefore we have a huge international game of “chicken” going on between multitudes of players.
The Russians are perhaps in the best spot out of all of the people involved, because they get paid in dollars, not rubles. They have a lower production cost, and some in the industry suggest that Russia has roughly 6 years’ worth of supply build up, and if that’s the case they certainly can play the long game with Saudi Arabia, which has a much higher breakeven level near $80 a barrel. At this point, rallies are to be sold and certainly looked at with suspicion.
On exhaustive candles it’s time to start selling again, but we certainly don’t have that quite yet. You could in a sense try to play “fill the gap” by buying this market but I think that will be very dangerous to say the least. It’s only going to take the wrong words coming out of the wrong person to send this market right back down. If the market were to break above the $42 level, that would be something rather impressive, although it is very unlikely to happen anytime soon. With this, I remain bearish, but I also recognize that the occasional relief rally could be quite violent.
