• Large sell-off on Friday could signal turning point for Oil markets
  • Price has been consolidating for several weeks near 3-year highs
  • Spec longs trim position but still extremely high

The strong moves lower in stock indices at the end of last week have threatened to sour risk sentiment in other asset classes with Friday’s session seeing a large decline in Oil. This created a rather ugly looking weekly candle which engulfed the prior week’s trade in its entirety.

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 A strong decline on Friday saw a bearish engulfing candle print on W1. Source: xStation

The last couple of weeks have seen price consolidate around the $70 a barrel mark with 67.60 providing support and 70.77 offering resistance. A break below 67.60 could be seen as an important development and would target a move to 64.43 if it plays out in a symmetrical manner. 

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 A break below prior support at 67.60 could see a sustained move lower. Source: xStation

An example of a similar pattern to this occurred previously in the move higher when a break above 64.93 ended a period of consolidation and saw the market make a significant breakout. Price reached its symmetrical target at 68.72. 

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 A similar pattern played out previously and hit its target at 68.72 after a break above 64.93. Source: xStation

We’ve noted previously that after a strong run higher there was an increasing level of speculative longs in the market and therefore, a pullback could occur. The latest data from the COT report has shown a tiny pullback in Brent crude but the levels remain very high historically speaking. The net position is in the 99% area relative to its 1 year max and with a long/short ratio of 14.6 the long trade is certainly a crowded one. 

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 Despite a small drop in the past week the spec longs in Brent Crude remain extremely high. Source: CFC, ICE, Bloomberg, Saxo Bank