Brent Crude Technicals – Trading higher due to supply fears

Crude oil saw huge gains yesterday on the news of Venezuela’s Hugo Chaves passing. The President of Venezuela lost his battle with cancer on Tuesday, placing the oil-rich nation into uncertainty. Market was worried that vacant leadership position will trigger a power struggle which will hamper the production and exports of oil, limiting supply in the near future. Venezuela holds the 2nd largest oil reserves in the world, with some data resources placing them as the top, ahead of Saudi Arabia. Brent Crude rose from below $110 a barrel to touch above $112.5 in the same day. WTI was more muted, but still managed to climb more than $1.50 per barrel from the lows.

Daily Chart

Despite the sharp recovery, the outlook of Brent is bearish. Price is still trading below the 50% Fib retracement after bouncing higher from the 61.8% Fib. The 50% Fib line is generally regarded as the separator between a “Reversal” and a “retracement”. If crude is unable to push back above 50%, the bears will continue to retain initiative to push lower. Ichimoku is also bearish with price recently showing a bearish twist when price trade broke free below the current Kumo. 112.0 round number is also a strong resistance which was keeping bulls at bay back in Nov and Dec 2012.

Hourly Chart

Hourly Chart is more bullish, however the 112.0 and the 50% Fib is still keeping bulls at bay. Stochastic has formed a top with readings looking to break below the 80.0 level. However there may be short term support in the form of Kijuu-Sen (red line) and also the bullish Kumo Twist that was formed just when price entered the Kumo. Looking at price action alone, 112.0 – 113.0 consolidation found on 28th Feb may also provide more resistance, and price should preferably break above the handle to break the Lower Lows, Lower Highs sequence to inject bullish optimism.

Fundamentally, Brent’s rally is also contributed by he increase optimism in risk appetite after Dow Jones Industrial Average pushed to record highs. However, reaction in Gold and US Yields suggest that the optimism may not be as strong as what we have hoped for. On the issue of supply, market may be over-reacting to the death of Chavez as Venezuela’s oil production actually fell under Chavez’s rule. A change in leadership actually may reinvigorate the production pipeline especially if the new leader is open for friendlier relationships in the US. Even if the political situation does not get better, it is unlikely to get worst. In the next 30 days, Venezuela should be able to appoint a new leader which will help to stabilize the country and the markets, and we could easily see the gains made yesterday evaporate and bear trend back on track.

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