Is Oil Ready to Crash Again?

With crude-oil futures in decline early this morning, it was no surprise to see oil prices open lower at the start of today’s trading session. Exacerbated by further signs of weakness from the Chinese, it appears as though oil could continue to drop.

Drivers will be happy to see gas costs sink at the pump, and in addition to making commutes cheaper, the next slump could please adventurous oil bears as well. After logging over 20% gains since the Christmas lows, a point of key resistance could prevent crude from climbing higher in the short-term.

The United States Oil Fund (NYSEARCA: USO), the largest crude oil ETF in terms of assets under management, fell 0.83% at the market’s open after sluggish futures activity predicted another “down day” for crude. At the time of writing, things have gotten slightly better for bulls, but recent price activity continues to show signs of another selloff. Add to that some significant overhead downward pressure from the general market and you’ve got the makings of an oil drop – possibly back down to the December lows:

It’s certainly a change of pace, especially after crude oil just broke out of a bear market (defined as a 20% drop from a recent peak) in the weeks prior. And while nimble traders may have pocketed some handsome gains in the new year, it looks like another opportunity is developing in the other direction.

Data out of China, which showcased weak import and export figures for December 2018, convinced many investors that a global economic slowdown is likely, if not inevitable. A reduction in economic activity would then lead, of course, to a lower demand for oil, causing prices to flop.

If prices close below last Wednesday’s low (which in USO’s case was 10.69), the next run to the bottom could easily follow shortly thereafter. Wednesday’s gap up of almost 3% may have used up too much of the market’s energy in a single trading session, and Friday’s red candle looks to be confirmation of that. Another red candlestick today could be enough to flip the trend, plunging oil back down to key support – a price level that must hold if crude is to avoid the lows of June 2017.

Long-term, oil still looks woefully oversold, having lost 65% of its value since the highs of 2008, more than a decade ago. And even though it’s dropped dramatically again (from 2018’s highs in October), crude is still trading well above the lows of January 2016, having nearly doubled in price since then.

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Short-term, however, oil bears may have a nice opportunity to snap-up some quick gains during China’s economic turmoil. They’ll have to act fast, though, as trade tensions between the communist party and the U.S. continue to cool – leading up to a possible truce that would encourage many bullish investors.

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