WTI Crude – Back Below 100.0 But Upside Risk Remain

West Texas Intermediate crude crashed to a fresh one month low, led by “risk off” sentiment during US session which drove S&P 500 and Dow Jones Industrial Average lower by 0.51% and 0.41% respectively. There was also speculation that crude inventory stockpiles which will be released later today would be higher than expected, dragging prices further lower than a breakdown of risk appetite would have on its own.

This assertion is reasonable as prices was actually relatively stable during the final hours of US session yesterday when the American Petroleum Institute report was released, reflecting an increase of 2.63 million barrels. In contrast, analysts are expecting a 1.85 million barrel increase in the Department of Energy report, showing that implied demand for WTI crude may be even lower than expected. Hence, the lack of bearish response at the end of US session suggest that market may have already priced in this scenario earlier. The implication of this would be a muted response later today unless the DOE report manage to top an increment of 2.63 million barrels. Anything less than that and we could see prices actually climbing higher.

Hourly Chart

From a technical perspective, bearish momentum is in play but it appear that we may be a tad Oversold. Furthermore, there could be a case for a wedge to be formed (albeit rather recently), and price could rebound from lower wedge in search of upper wedge – favoring a short-term rebound scenario echoing what Stochastic is telling us. When we add in the higher upside risk moving into the DOE report the likelihood of a short-term rebound towards 100.5 support turned resistance (and possibly confluence with Upper Wedge) increases.

That being said, with risk appetite looking vulnerable in Europe right now which is likely to spillover to US session for a 2nd consecutive day of losses, broad downside risk remains and there is a chance that bullish reprisal will be muted even in the event that DOE numbers are more bullish than thought. Hence, traders should not simply go long blindly and the target of 100.5 may not even be reached before prices reverse once again.

Daily Chart

Price is also under tremendous bearish pressure on the Daily Chart, with the break of 101.0 impairing bullish momentum greatly. However, as momentum is similarly deeply oversold, coupled with the fact that bullsih momentum is not fully invalidated, it is highly unlikely that 99.0 will be broken easily. As such, traders seeking to sell may wish to  wait for further confirmation. Considering that bears could potentially reach low 90s if bullish momentum has fully capitulated, the opportunity cost for the confirmation will be relatively small in exchange for higher certainty and lower risk.