Przemyslaw Radomski, CFA: In our previous essay on crude oil we examined the medium-term outlook for light crude and the oil-to-oil-stocks ratio to see if there’s anything on the horizon that could drive the price higher. As we wrote in the summary:
(…) light crude almost reached the medium-term support line, which may trigger a bigger pullback. Additionally, the oil to oil stocks ratio is at an extreme low, as indicated by the RSI. This could very well result in the end of the underperformance and strong performance of crude oil.
Since that essay was published, crude oil has hit a fresh monthly low of $93.07. In spite of this drop, yesterday light crude bounced off this level after the EIA showed that crude oil inventories rose less than expected last week. It was the biggest gain since October 17 and the price came back to around $95 per barrel. Does it mean that the final bottom in crude is already in? Before we try to answer this question, we’ll take a look at the situation from the long- and the short-term perspectives to check whether they confirm the indications from the medium-term picture or not.
Let’s start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).
As you see on the above chart, there are two long-term declining support lines. The blue one is based on the July 2008 and February 2012 highs. When we take this line into account, we see that crude oil broke below it the previous week, which is a bearish sign. However, if we take into account the black long-term support line (based on the July 2008 and May 2011 highs), we see that light crude still remains above it and the situation is not that bearish.
In the recent days, crude oil reached the medium-term rising support line based on the June 2012 and April 2013 lows (around $93 per barrel). Additionally, it also moved to the long-term support line based on the July 2008 and May 2011 highs. In this way, light crude reached two important support levels and from this perspective it seems that the room for further decline is limited.