After failing to consolidate above the 87 level, Brent oil prices continue to gradually pull back. Prices are already very close to the level of 83.5, which is the lowest since OPEC+ has announced additional cuts in oil production. A breakdown through the 83.5 level would mean that buyers are weak. Thus, bears will have a chance to push the price to closing the gap formed at the beginning of April.
In spite of fundamentals showing that oil prices are expected to remain high due to supply shortages, sellers are able to push Brent towards the 80 mark in the short term. This may be due to the fact that traders and speculators have lost interest in the oil market a bit. They have already benefited from a strong upward movement following the news from OPEC+.
Last week, market participants actually completed a massive closing of short positions. In order to do so, they had to buy back 225 million barrels of oil contracts over the previous three weeks. The cycle of prevailing short positions in the oil market, which had started around 27 January and reflected fears of a slowdown in economic growth, ended by mid-April.
Meanwhile, bulls are actively taking profits. According to Bloomberg, most oil exchange-traded funds (ETFs) have seen four consecutive weeks of outflows. This is the longest run of liquidity withdrawals in eight months.
Last week alone, around $211 million was withdrawn from WisdomTree Brent Crude Oil, United States Oil Fund, WisdomTree WTI Crude Oil and several others. According to Sonia Kumari, commodity strategist at ANZ Research, the outflows are due to profit taking triggered by the OPEC+ decision.
If no new upside triggers for oil prices emerge in the coming days, the priority scenario will be a gap closure at $80/bbl for Brent. A strong breakdown of the 83.5 level would increase the likelihood of such a decline.
Consider the following trading strategy:
Sell Brent oil when it breaks down the 83.5 level. Take profit – 80. Stop loss – 85.5.
This content is for informational purposes only and is not intended to be investing advice.