Can “golden cross” save Brent bulls?

• Brent's 50-day SMA could soon cross above 200-day counterpart
   
• However, other forces may negate bullish "golden cross" signal
   
• Oil weighed down by risk of higher Venezuela/Iran supplies
   
• Oil dropped on technical pullback, deteriorating China economy
   
• Brent may yet return into sub-$80/bbl levels, while $88 offers strong resistance

 

 

Brent’s 50-day simple moving average (SMA) is currently teasing its 200-day counterpart.

Prices of the global oil benchmark are climbing at the time of writing as Brent tries to halt three straight days of declines.

Traders typically see a bullish signal (a sign that prices will go higher) when the 50-day SMA crosses above the 200-day SMA to form a “golden cross”.

The last time Brent formed a "golden cross" on the daily charts was back in late-September 2020.

After that previous episode, Brent went on to soar by more than 200%, going on to peak just above $130/bbl following Russia's invasion of Ukraine.

 

However, there are other forces at play that may offset a bullish signal from a "golden cross".

 

Here are 4 reasons why oil prices have been falling of late:

1) US-Venezuela talks

The US is discussing with Venezuela about possibly lifting sanctions on the latter’s oil exports temporarily.

Keep in mind that Venezuela boasts of the largest crude oil reserves in the world (though its refining capabilities are limited).

Should these sanctions be lifted, it risks sending out more crude oil into the world.

NOTE: Greater supply tends to translate into lower prices, all else equal.

The Biden administration is dangling this carrot so that Venezuela would hold fair elections in 2024, while lower prices at the pump would also placate the US voter base.

 

2) Iran’s exports surge

Iranian oil, which is sanctioned, has been making its way into China at the highest level in about a decade!

When China, as the world’s largest crude importer, is taking in such shipments, it lessens the need for China to buy oil from other producers, prompting depressed global oil prices.

 

3) China’s waning recovery

Much has already been made about China’s stuttering economy, as wary consumers have heaped more pressure on China’s property sector, which in turn risk financial instability.

Oil markets are concerned about the sluggish demand levels in the world’s second largest economy, and also the world’s largest crude importer, which has led to falling oil prices.

NOTE: Lower demand tends to lead to lower prices, all else equal.

 

4) Technical pullback

Brent bulls could do no better than the $88/bbl handle earlier this month, which makes sense given that that price region has capped Brent since last November.

That peak also saw Brent’s 14-day relative strength index (RSI) – another widely used technical indicator – breaking into “overbought” territory.

That technical event signalled that Brent was indeed ripe for a pullback, and it duly did (see chart above).

 

Brent looks past positive catalysts

The above factors even prompted oil markets to shrug off signs that oil inventories worldwide are around a 6-year low.

Also, the Energy Information Administration (EIA) this week reported a larger-than-expected 6.1 million barrel drawdown in US inventories to reach its lowest levels since December!

 

 

Where to next for Brent?

From a fundamental perspective, of course it boils down to the supply-demand equation.

 

Further declines in Brent prices may prompt Saudi Arabia and Russia to further crimp their oil shipments.

Such supply cuts may then shore up Brent price and help them stay close to the $88.00 resistance zone.

 

However, Brent may languish back in sub-$80/bbl levels if the Chinese economy continues to produce worrying signs, coupled with the risk of more oil supplies out of Venezuela and Iran to offset Saudi/Russia’s lowered shipments.

If further declines aren’t thwarted at the 50-day and 200-day SMAs, then the 100-day SMA may then be called for support just below the psychologically-important $80/bbl mark over the near term.

 

Oil Brent Sanctions US President Joe Biden OPEC+ Saudi Arabia Russia technicals golden cross