By Kathleen Brooks, research director at XTB
The oil price has fallen sharply this week, and is currently trading below $110 per barrel, after falling more than 3% in the past five trading sessions.
On a short term basis, this pull back is having a major impact on technical indicators. The MACD and short term momentum indicators are pointing to a bearish environment for the oil price in the near term, and downside momentum is building.
However, there could be a limit to Brent’s decline. Key support lies at $109.00, which could attract short term buying interest. On the upside, short term resistance lies at $110.40. If the oil price recovers above this level, it opens the door to a reversal of recent weakness and a return to the $112.30 highs from earlier this week.
In the longer term, the oil price remains in an uptrend, and Brent crude is still higher by 11% in the past month, as tensions in the Middle East remain a key driver of stronger oil prices, especially as the Northern hemisphere enters the winter months.
The trigger for this week’s weakness in the price of oil are reports that the US and Iran will resume diplomatic efforts to end the war. This news has taken the froth off the oil price, however, for a deeper decline the market will want a concrete peace proposal.
There is a structural war premium attached to the oil price, which is keeping Brent crude above $100 per barrel. If we do see progress in these plans between the US and Iran, then key support to watch includes $101.50, the 200-day sma. For the oil price to return back to double figures, selling pressure has to build significantly to clear this important support level.
For now, the bias suggests further downside, although the price could get sticky around $109.
Chart 1: Brent crude daily chart, with 200-day and 50-day smas.
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