Oil has garnered much attention since its plunge from the middle of last year, from over $100 a barrel to now just over $37 as I write this post. Here's the chart for your viewing pleasure, with some key levels annotated. These are not trade levels, just levels to watch to observe price reaction, should help to form your context for trading.

Now don't be too eager to participate in this if you haven't traded oil before. There are many forex and CFD brokers out there offering this product, so it is probably in your trading platform if you look for it.

Many people have tried picking the bottom on this drop, you can see buyers stepping in around $45, bringing prices up to $60 before the sellers came in to continue the downtrend. Then bottom pickers came in again around $40, we saw a pop to $50 before prices got pushed under $40 once again. Clearly, it pays better to trade with the trend.

There is a key low very near to where we are and it is likely we'll see that low tested. $33.20 was the low reached in 2009. Here's the weekly chart to show the level.

Technically we are seeing a move higher, possibly an opportunity to get short with the trend again. Reports indicate that the suppliers of oil are still producing at full speed. It is fairly cheap to pump oil out of the earth as compared to fracking, which is a new method of extracting oil from shale. Conventional oil costs under $20 per barrel around the middle east, and between $30-40 in other parts of the world. Shale oil costs anywhere from $40 to over $90 per barrel to produce, depending on the well itself. So one must wonder if the conventional oil suppliers were intentionally flooding the market with supply, so as to bring oil prices down to a level where oil fracking wasn't profitable. Hmm.. some food for thought. =)

So where is oil headed?

It's fairly clear the trend for oil has been down, but the price of oil certainly can't go to zero. To be honest, nobody knows for sure where oil is going in the short term. But we do have a couple of signposts to watch out for.

1) Logically, knowing what we do about the production costs, we would expect prices to be stable above $20 in the long run. So prices would probably head lower and stay around these levels for some time before heading higher. Threat of a global slowdown doesn't help matters either, so we could be in for a long period of lower oil prices even. Nevertheless, right now oil has an established trend to guide our trades.

2) FOMC is on later tonight, with a very high expectation of a rate hike, likely the first of many hikes ahead. A rate hike usually means a stronger USD, note that oil prices are quoted in USD? Yes, chances are if USD strengthens, it will pressure oil prices lower.

Buckle your seatbelts ladies and gentlemen, we're in for volatile period in the markets. If you trade, remember to always watch your risk!

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