Oil drilling exploration. Image source: Pan Demin © 123RF.com
The price of crude oil appears to have found a solid support level following yesterday's crash. It plummeted by nearly 5 per cent during yesterday's trading session on the bigger-than-expected inventories in the US.
The Department of Labor recorded 1.442 million barrels in the strategic reserve for the previous week versus 1.2 million expected.
US Crude Oil Inventories. Image source: TradingEconomics.com
In the context of the broader picture, however, this seems more like an intermittent ripple in an otherwise bullish market as opposed to a decisive turning point for the underlying supply and demand equilibrium.
The first crucial piece of evidence for this is encompassed by the ongoing normalisation of demand in the US, which can be inferred from the stabilisation in the strategic reserve. As can be seen from the chart above, the misbalance from the early days of the crisis is almost invalidated.
Secondly, due to the timely intervention of OPEC's members, the previously detrimental supply glut has been partially offset, which continues to drive the prices of the commodity higher.
As can be seen from the 4H chart below, the recent dropdown was initiated after the price action failed to break out above the 61.8 per cent Fibonacci retracement level at 40.60. We outlined this possibility in our last analysis of the commodity.
Afterwards, the minor support level at 38.10 evidently held back the dropdown as the price action started consolidating above it. The emergence of a hammer candle followed by a bullish hold line is demonstrative of the rising bullish sentiment in the short run.
As was mentioned earlier, yesterday's market surprise is not substantial enough to shift the underlying supply and demand pressures. Now that the market has priced in these developments, the underlying price action is ready to resume trading higher.
These expectations are going to be confirmed once the price action manages to break out above the 10-day EMA (in blue) and the 10-day MA (in red). Additionally, a bullish crossover between the two moving averages would support those projections as well.
US Oil 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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