Apparently, the quickest way to bring oil prices back down is to give Trump a good old-fashioned electoral beating. That seems to be what the market is telling us after the Democrats swept the US midterms at least.
WTI crude is coming under heavy selling pressure since overnight as traders are betting that Trump’s political setback could pave the way for a de-escalation of the US-Iran war. So, why exactly the change of heart?
Well, Trump now faces a much tougher political landscape at home after Democrats have taken over control of Congress. The war has already taken a toll on the average American through higher energy prices and the election results suggest that voters have had enough. So, the idea here is perhaps that might finally give Washington a stronger incentive to pursue diplomacy rather than further escalation.
That being said, are oil traders getting a little ahead of themselves here?
We’ve seen time and time again that hopes for peace are one thing, but actually getting a deal across the finish line is a whole other thing. And while there is hopeful optimism among traders again now, there’s still no guarantee that either Washington or Tehran will make the necessary concessions needed to end the conflict.
As for oil prices, we’re now approaching a crossroads of sorts this week.
WTI crude is testing a critical support region around $86.80 to $87.00, where the 100-day (red line) and 200-day (blue line) moving averages are converging. The 50.0 Fib retracement level of the rally from July to September also sits nearby at $86.90, adding to the significance of this price region.
But at least for now, sellers are looking poised after already forcing a break below the trendline support from the July to August lows. As such, that leaves buyers with an important defensive job on their hands.
A firm daily close below this support region could invite a deeper correction towards the 61.8 Fibi retracement level at $82.21, before the psychological $80 mark comes into focus.
Conversely, buyers will need to reclaim a break above the swing region around $88.75 to $88.00 to wrestle back some control and then $95 again to begin repairing the technical damage.
On the balance of things, I’d argue that the technical picture is starting to favour sellers at the moment. But with the Iran war still unresolved, one unexpected headline could easily turn this latest selloff on its head.
This article was written by Justin Low at investinglive.com.