Crude oil price had a difficult time advancing lately, as the economic recovery during the COVID-19 pandemic falters. The technical picture looks bleak – bearish divergence, rising wedge, horizontal resistance. On top of that, the fundamentals are weak too.
After the negative $40 close in April, the price of oil recovered significantly. As demand picked up due to the lifting of lockdowns, the price recovered. Mobility indexes rose again, suggesting economic activity will improve gradually.
All in all, any sign of economic recovery was bullish for crude oil price, as it suggested increased demand moving forward. Two reports this week blow the fundamental picture for crude oil. They both suggest the recovery is stalling, thus a negative for the price of oil.
Crude oil inventories rose this week more than expected. On expectations of a decline of -2.1 million barrels, US oil inventories missed the number by almost 6 million barrels. It suggests the largest economy in the world has a hard time bouncing back and, implicitly, demand for oil declined.
Yesterday’s initial jobless claims in the United States rose for the first time in sixteen weeks. In a sign that they bottomed out, they suggest the recovery is stalling.
On top of that, weekly gasoline demand declined for two consecutive weeks – yet another sing of incomplete recovery.
Three factors contribute to the bearish technical picture for the price of oil. First, the recovery from the negative territory falters at previous support turned resistance.
Second, the price forms a rising wedge – a bearish pattern, usually forming at the top of rising trends. Third, a bearish divergence with the RSI confirms the rising wedge, putting further pressure on price.
A medium-term trade should wait for crude oil price to break $38 to the downside. Next, place a stop-loss at $42, targeting as low as $25. The price following a rising wedge often retraces 50% of its length. Therefore, $25 sits within that range.
