Crude Oil continues to slide but finds support at $42.60

The question traders have to answer now is whether we will see a significant bounce and a recovery in Crude Oil prices just as the previous two times or whether it will be different this time.

Commodity prices have been falling across the board; Gold, Silver and Oil are all down in November. Focusing on Crude Oil, we can see that the decline has temporarily stopped at a key support level at 42.60. This level is significant, as the commodity has bounced off it three times this year already. First last March, a low of $42.64 printed before prices climbed all the way up to $62 in the following 7 weeks.
The support level at $42.60 held successfully on Oct. 27th again when prices subsequently recovered to $48. Last night, the price again touched support at $42.60 after the price has dropped 11.9% in the last seven trading days from a high of $48.36. However, the price quickly recovered above $43.
The question traders have to answer now is whether we will see a significant bounce and a recovery in Crude Oil prices just as the previous two times or whether it will be different this time.
Will we see a new yearly low in 2015?
To answer this question we have to look at the bigger picture to understand what has been happening with the global economy and the commodity in particular.
Global Economy
Parts of the world are not recovering as quickly as projected such as the UK and Europe. The US is doing better but what is of real concern at the moment is China. GDP is growing below 7% for the first time in more than a decade and exports are declining. This leads to lesser demand, which ultimately weighs on the price of oil.
Commodity outlook
The rig count in the US has fallen an average of more than 10 per week in the last 2.5 month. On Friday, we will see if this trend continues. Contrarily, inventories have been going up for six straight weeks. Today we are expecting an update on whether these stockpiles have again increased. An increase of 1.7 million is estimated, however, in the last 5 weeks estimation have four times beat expectation. If this happens again, there could be renewed pressure on Crude. Additionally, OPEC is committed to leaving its production levels unchanged. This has been putting great pressure on the commodity.
If data continues to support a bearish outlook for Crude Oil and key support at $42.60 is significantly broken, we could be on the way to a new yearly low.
Tarik Chebib is the Head of Trading Services - IG Dubai
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