The tension in the energy space resulted in oil prices remaining range bound last week. The most significant was news that China announced 25% tariffs on $16 billion worth of U.S. goods, including autos and some oil products like fuel. The story put downward pressure on oil Wednesday, but prices recovered slightly later in the week.
Interestingly, China chose not to put tariffs directly on U.S. crude oil imports. The decision, analysts say, reflects China’s substantial import needs, particularly with oil supplies from Venezuela in decline and supplies from Iran potentially disrupted by U.S. sanctions. China’s latest tariff move was in response to the U.S. putting 25% tariffs on $16 billion worth of Chinese goods previously. The most recent U.S. list brings the total value of Chinese products facing a 25% import tariff to $50 billion.
U.S. Oil Projects Under Threat
In addition to tariffs on Chinese goods, the Trump administration announced late Friday that the U.S. would double tariffs on steel and aluminum imports from Turkey. The announcement comes as a diplomatic dispute between the two countries escalates. Oil industry executives are concerned that this latest tariff decision could further increase costs for domestic oil and gas pipeline projects that are already facing huge bottlenecks.
OPEC Monthly Oil Market Report
On Monday, OPEC will publish its latest monthly oil market report. Traders and analysts will be closely watching for changes in OPEC’s supply and demand expectations. Last month, OPEC said that it expects world oil demand in 2019 to grow by 1.45 million barrels per day (mb/d) year over year, a slowdown from 1.65 mb/d growth in 2018. The cartel also said that it believes non-OPEC oil supply for 2019 will grow by 2.1 mb/d, broadly unchanged from 2018.
Late on Friday last week, the IEA released its monthly oil market report in which it said that higher output from Saudi Arabia and Russia had reduced concerns about a global supply shortage. The IEA revised up its forecast for world oil demand in 2019 by 100,000 barrels per day from last month to 1.5 mb/d.
The most significant data in these latest forecasts is the expected decline in demand growth from the U.S. in 1Q19 and the absence of any demand growth from Europe. The drop does not seem to be a seasonal factor, because demand growth was strong in 1Q18. If the IEA’s demand forecast eventually proves to be correct, then it does not paint a very bullish picture for oil in an environment of rising supplies from some producers that are adequately meeting falling output from others.
Crude Oil Still Range Bound
Oil spent another week struggling for direction, trading in a range between $70 and $66 per barrel. It started off last week testing $70 per barrel on both Monday and Tuesday but failed to make gains at that level. By Wednesday, the bears were entirely in control following news of a more significant increase in U.S. crude oil product inventory like gasoline, driving prices sharply lower on the day. Thursday was a classic doji candlestick as the market floundered for direction. Friday was a bit of a relief rally, but most importantly, oil again failed to reach the previous week’s closing price.
Examining the daily price chart, we see that the 21-day exponential moving average is about to cross down through the 55-day moving average, which is itself starting to point lower. This moving average cross is a significant bearish technical indicator and indicates that oil could be about to break down.
Another bearish sign is the fast line of the moving average convergence divergence (MACD) remaining below the neutral zero level. MACD below zero is a bearish signal indicating that prices are trending lower. MACD is also a momentum indicator, so a downward trending fast line – in black – tends to mean an acceleration of any downward price move.
Other technical indicators also remain bearish for oil. On a daily price chart, for example, there are currently no buy signals and seven sell signals. Technical indicators on a longer-term weekly price chart are presently neutral, with three buy, three sell and four neutral indicators. If the technical indicators on the higher timeframe weekly price chart move to bearish signals in the coming weeks, this would be particularly problematic for the bulls.
Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment or trading advice. Oil price chart courtesy StockCharts.com.
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