Crude Oil prices may weaken further

Industrialized oil consumer countries yesterday announced the release of 60-million barrels of oil from government stockpiles, driving oil down more than 6%. The 28-member International Energy Agency (IEA) said it would release 2-million barrels a day (bpd), mostly of crude, over an initial 30 days to fill the gap in supplies left by the disruption to Libya’s output. The US will provide half the volumes from its huge 727-million barrel crude reserve, with Europe supplying 30% in crude and refined products and the rest coming from Pacific Ocean states belonging to the Organisation for Economic Co- Operation and Development. For more, go here.

The question to ask is why was this decision taken only at this point in time. After all, if you look at the chart for WTIC, we can clearly see that the uptrend line was violated about two weeks ago. Notice the MACD indicator is now deep inside the negative territory, which normally signal the start of a bear trend.


Chart 1: WTIC's daily chart as at June 23, 2011 (Source: Stockcharts)

Below, we have a slightly different view of the state of the crude oil market, as represented by Brent crude, but the outlook is the same. The chart is a weekly OHLC chart plotted on linear scale, unlike the above WTIC chart which is a daily line chart plotted on log scale. Brent has broken its immediate uptrend line at USD110. It may find support at the horizontal line cum long-term uptrend line at USD90 and thereafter the horizontal line support at USD70. The MACD has already hooked down. The ADX is dropping very fast while the -DI is rising to meet a decline +DI. Stochastic RSI is oversold, a pre-condition for a bear trend.


Chart 2: Brent's weekly chart as at June 23, 2011_plotted on log scale (Source: LC LiveCharts)

As such, I expect crude oil prices to weaken further in the weeks ahead.