Crude Oil in Position to Break to Low $40’s by Late August

September Crude Oil futures finished the week well off its high at $50.03, closing at $46.12, down $3.53 or -7.11%. Crude oil prices have been trading mostly lower since the U.K. voted to leave the Euro Zone, a move that could lead to a recession in Britain and Europe and a drop in demand. However, last week’s price action suggests the market may be finally reacting to the bearish supply/demand situation also.

The day before the Brexit referendum, the market closed at $50.76. Two days later it reached a low of $46.53. A subsequent short-covering rally sent the futures contract to $50.70 on June 29 and since then it has been downhill all the way with the September contract reaching a low at $45.47 last week.

The futures contract fell nearly 5 percent on July 7, reversing early intraday gains after the U.S. government reported a weekly crude oil draw that was a bearish surprise to bullish traders expecting a larger drawdown.

With supply declining slower than expected and demand expected to fall because of the aftermath of Brexit, crude oil prices are expected to continue to weaken over the near-term until they reach a value area. At that point, the markets may stabilize, but there is still no guarantee we’ll see $50.00 again this year given the situations in the U.K. and Europe.

Technically, the main trend is up according to the daily swing chart. However, momentum has been to the downside since the top at $52.73 the week-ending June 10.

The short-term range is $38.67 to $52.73. Its retracement zone at $45.70 to $44.04 is the first downside target. If investors perceive this zone as value then we could see buyers show up on a test of this zone to stop the price slide. This could produce a short-term technical bounce.

The main range is $32.85 to $52.73. Its retracement zone at $42.79 to $40.44 is the primary downside target. This is the major zone that will decide whether we stabilize the rest of the year or whether we retest the contract low.

Currently, the market is falling faster than a Gann angle that is dropping at a rate of $1.00 per week (Blue Angle). If it continues to follow this angle lower then we could see a test of the major 50% level at $42.79 the week-ending August 19 or the 61.8% level at $40.44 the week-ending September 2.