Is the rally over or can we still benefit from the rising price?

The price of oil has been extremely bullish over the past 2.5 months since the 20th of April when it reached the $0 mark and the short-term futures contract even went to the negative territory.

What was the reason for that huge sell-off on the price?
The main reasons for the huge depreciation on the commodity were the low demand during the coronavirus, as well as the oversupply on the market in the meantime. In fact, the price was trading at the $65 highs on the 8th of January, which was its peak for the year, to reach $0 on the 20th of April. It is important to say that the demand for oil decreased substantially in the past few months due to the coronavirus outbreak and the fact that the virus started spreading from China to Italy, then all across Europe towards the United States and then all around the world. Logically speaking, when the countries blocked their borders and closed their airports, as well as cancelling all flights, this had an extremely negative impact on the demand for oil. Furthermore, people all around the world were in a lock down and unable to go to work, drive their cars or travel around at all. In fact, the industrial sector was hit immediately and the construction companies stopped their operations, which also led to a massive decrease in the consumption of oil because all the machinery used in construction, uses oil to operate. On top of that, the production of oil remained very high for a few months until the beginning of May when OPEC+ members agreed to start cutting the daily production by 9.7 million barrels. Yet, their actions took quite longer than expected and traders and investors have been selling oil actively on fears that demand was on record low levels, while the market was extremely oversupplied, leading to a massive sell-off and the price reaching $0 in a short period of time.
In fact, as soon as the virus started spreading around and the price of oil started depreciating quickly, OPEC members made an attempt and proposed to non-OPEC members, such as Russia, to cut oil production in order to support the price. Yet, Russia refused and we saw an immediate further bearish reaction on the price. Actually, the price of oil saw a massive correction from the $65 highs in the beginning of January to the $50 mark a month later. Due to the fact that no deal was reached, the price kept dropping massively to the downside and reached the $20 mark in the end of March to fall further and reach the $0 mark 3 weeks later. It is important to mention here that this is the first time in the history of financial markets when the price of oil reaches $0. In other words, this is a historical event that people will be in reading in books about in the future.
As soon as the price reached the $0 mark, all investors started buying aggressively at that level as they knew an oil production cut had been reached already and it was only a matter of time before the price recovers back to the upside. Well, let’s face it – it wasn’t hard to predict the rise on the price from $0. An immediate bullish reaction followed – the price reached the $21 mark on the next day, followed by a massive bullish appreciation towards the $40 mark in early June.

The main reason for the huge bullish rally on oil was driven by the fact that the situation with he coronavirus improved over the past couple of months and there have been many countries that have started opening their borders, allowing people to travel. Moreover, the situation with the virus has improved on a local basis as well – the affections started decreasing and that allowed different countries to let people go back to work and travelling again.

Here we need to say something very important – the market is driven by expectations.

That means as soon as investors read about the good news surrounding the virus and the fact that the situation has started improving, they started buying oil aggressively on expectations that countries will start opening their borders, let people go back to work, businesses will start operating again and all of that would start boosting the demand for oil. That’s why the price kept on rising for 2.5 months since the first week of June and lots of profits have been made to the upside. Yet, due to the massive bullish rally, the technical indicators had gone to the overbought territory and started giving indications for a potential correction in the short-term. Moreover, it was only logical to expect a profit-taking correction after such a massive rally to the upside anyway.
Yet, that was not the only reason for the correction that occurred. The other main reason is the fact that the World Health Organization (WHO) has warned for another rise of the COVID-19 cases across the globe due to lifting the lock down in most of the countries out there. That of course has led to a bearish movement on the price of oil as investors are cashing in the profits they have already made to the upside and that has also motivated sellers to start opening their short positions, leading to a quick 10% correction towards $36.

However, the fears for a potential second wave of the COVID-19 have come together with some of the biggest oil producing countries and companies out there discussing a further potential oil production cut, which is currently mixing investors as to what the next price movement would be. Should the biggest producers out there cut production further that would of course have an immediate bullish impact on the price.

Therefore, has the right time come to buy oil again?

The daily chart shows that the price has struggled to go above $40 for a few consecutive days. The reason for that is because lots of take-profit interest takes place every time the price reached that level in the past week. In other words, the price has attempted to break the $40 resistance but has only failed to close a candle above that level. As we stated earlier, the reason for that is because of the fact that the price is extremely overbought already and traders have been afraid to buy so high before the price makes at least a small profit-taking correction.

The RSI and Stochastics have started giving some short-term bearish indications and crossed down in the overbought territory.

Furthermore, the Stochastics indicator is forming a divergence formation at the moment. In other words, while the price has been forming higher highs and higher lows in the past few weeks, the Stochastics has formed lower highs and lower lows, giving some indications for a potential bearish reversal on the chart in the short-term. Well, the lack of further bullish activity is a fact and the price has been struggling to break that key resistance at $40, followed by a correction towards the $36 mark.

Chart: Oil (daily)


Considering the news that came out in the beginning of June saying that OPEC members together with Russia have agreed to extend the oil production cuts during the month of July with 9.7 million barrels a day or 10% of the global output, we remain strongly bullish on the price for the longer run.
However, the short-term picture looks different and the technical indicators together with the price action give us some indications for a potential further pullback on the price before it starts its strong appreciation again. Furthermore, we need to take into account the fact that the reason OPEC & Russia agreed to extend the production cuts was also based on some worries in regards to the fact that there are still huge stocks of oil on ships and tank farms that could flood the market. In other words, the oversupply of oil around the world still remains a global issue for the price of the commodity.

The price is currently consolidating between $36 and $37 in the middle of June. By looking at the daily chart, one could easily see the strong support at $32, followed by the next key support at $30 where lots of buying pressure is expected to take place. So, we believe it is just a bit too early for those investors interested in buying oil and they could wait for a further profit-taking correction on the price in the short-term that could easily send the price towards the strong support at $30-$32 where lots of buying pressure is expected.

Therefore, we would start buying oil at the first strong support at $32. Should the price drop towards the psychological support at $30 we will be interested in buying more and improving our average cost basis, which in turn would give us a chance to further maximize our profits to the upside. In terms of collecting profits, we will start selling our holdings at the $38-$39, just below the resistance at $40 where more profit-taking interest is expected that could lead to another short-term correction. For those investors willing to keep the position longer, we believe the next take-profit target could be reasonably set at $47, where it would be smart to collect some profits below the psychological resistance at $50 where more profit-taking activity is expected to take place.

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Sincerely,

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