CRUDE OIL GOING INTO THE WEEK


- By Chinedu Okoye 




Comfortable within Range:

Crude seems to be comfortable within the support and resistance territory of $71 and $75 mark respectively for BRENT, and $67 and $69 for WTI. The week ending October 25th saw BRENT close at a (recent) high of $76.05/pb and WTI at $73.10, however the week ending November 1, saw both benchmarks decline, with BRENT falling more compared to WTI from the prior weeks close.

We use both a technical and fundamental Case to support the assertion of crude settling at these levels before trending upwards.



Technical Case:

We make a comparative analysis based on the figures presented below comparing price movements at the close on Friday October, and a week later November 1, 2024.

              Oct 25        Nov 1
BRENT: $76.05        $73.65
WTI :    $71.10         $69.64
SPREAD:$4.65          $  3.61
AVG:     $73.78

Technical Support Levels:
BRENT: $71
WTI: $67
SPREAD: $4
AVERAGE: $69

New Technical Resistance Levels:
BRENT: $73
WTI: $69
SPREAD: $4
AVERAGE: $71

Technicals Analysis:

Both benchmarks and the figures show picked up trading on Monday October 28th on a lower bid. But WTI drawdown was less than BRENT, and even though their movements were in tandem, the former recorded a higher bump in the week than BRENT.

This is emphasized by the spread movement as the BRENT WTI Spread (the oremium at which BRENT sells over WTI) dropped by over a fifth to $3.61 on Friday to $4.65.

As said in a previous post, on our Twitter Page, a rise in Crude prices that involves a high spread might lead to an underbidding of BRENT relative to WTI to the point that the spread reduces from a higher demand for the US Crude Benchmark. (Explained further below)

It is on this basis that we believe that the commodity is comfortable between the support and resistance range. Below we give fundamental reasons to support our price level thesis. 



Fundamental Case:

Whether these levels are sustainable at this range is left to be seen but there are reasons to believe that this could be bottom – though prices could temporarily break above or beyond. The first of such is the ongoing easing and the commitment advanced Central Bankers have shown to step in to secure a soft kanding for the economy.

If the ongoing easing persists and is effective, we do not foresee a major setback for the global macroeconomy so much so that industrial demand for Crude Oil and products therein to drop and/or stay low for longer than a couple trading weeks.

The propensity for US Supply to increase is offset by an OPEC supply tightening (or a continued pause in current production levels). Cheaper credit also insulates fossil fuel dependent industries who might look to take advantage of a momentary drop in prices.

Barring a steep economic downturn, Crude Oil prices should hold at these levels before the lagged effect of monetary easing kicks in. Thus, a lot depends on if the economic contraction or reduced industrial activity being balanced out by lower rates.



Summary: Spreads and Averages and Expectations

Because we expect both benchmarks to mirror each others movement, we would focus on the benchmark average for pointers as to where prices maybe headed.

Though generally a rise in the average would be due to the movement in both prices, so the spread helps in determining directional movements. 

We expect that where both benchmarks increase and spreads widen –to above $4, a pullback could most likely follow (as Brent becomes more expensive), and where both prices rise and spreads tighten (below $4) the increase could be sustained at higher levels.

Should prices fall and spreads rise, it could indicate a slower rise up and possibly new lows (the market would seem unperturbed or concerned with the lower WTI discount). However if it is accompanied by a tightened spread, a rebound could be expected and the commodity pairs back some gains. 

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