Despite hitting its lowest level in over a year earlier in the week, crude oil is showing signs of stabilizing. This is perhaps an early indication that the worst of the selling may be over. With crude oil, sentiment is being influenced by expectations of production cuts by OPEC and its allies.
Crude Oil
U.S. West Texas Intermediate crude oil futures is currently in a position to post a potentially bullish technical closing price reversal bottom on the weekly chart. Helping to form the chart pattern is Thursday's rapid reversal to the upside on the daily chart. This move was fueled after industry sources said Russia had accepted the need to cut production, together with OPEC ahead of its meeting in Vienna on December 6-7.
At the start of the week, crude oil was in a position to post one of its biggest one-month declines in November since the worst of the financial crisis in 2008, having dropped about 22 percent so far. Primarily driving the price action this month has been increasing supply by the United States and Saudi Arabia.
Russia Changes its Tune
After U.S. crude oil fell below $50 for the first time in over a year, the news hit that Russia would consider joining OPEC and other producers to cut output. This triggered the technical reversal in the markets.
The reaction by traders to the news about Russia was primarily driven by short-covering, but nonetheless, it is a good sign that the buying may be greater than the selling at current price levels. Furthermore, it also puts the markets in a position to close higher for the week, which would also be a positive development.
The Russian news also seemed to catch investors by surprise because on Wednesday, Russian President Vladimir Putin said he was in touch with OPEC and ready to continue cooperation on supply if needed, but he was satisfied with an oil price of $60.
Sentiment shifted on a report that the Russian Energy Ministry held a meeting with heads of domestic oil producers on Tuesday, before a gathering in Vienna of OPEC and its allies on December 6-7.
"The idea at the meeting was that Russia needs to reduce. The key question is how quickly and by how much," said one source familiar with the talks between Russian oil firms and the ministry.
Ahead of next week's OPEC meeting, the market is looking for the cartel and its allies to reduce production by 1 million barrels per day.
Crude Oil Technical Analysis
(Click to enlarge)
Although January WTI crude oil is trading well above previous bottoms at $47.96 and $46.00, this week's price action has been more about the chart pattern than the price levels. Furthermore, the market has been more headline driven than price driven. In other words, the developing reversal bottom on the weekly chart isn't being formed, per se, by aggressive bottom-pickers or value-buyers, but by speculation that the steady flow of increasing supply from OPEC and its allies may be nearing an end.
During a prolonged move down in terms of price and time, markets often make sudden reversals to the upside when the selling pressure dries up. This then makes the short-sellers nervous and they start to pay up just to get out of their positions. This is the pattern we are currently looking at on both the daily and weekly crude oil charts.
The point is, the rapid reversal to the upside does not signal a change in trend, but rather a change in sentiment. The stronger the shift in sentiment, the greater the short-covering. It may eventually develop into a change in trend, but if you're a counter-trend trader then initially you should look for a 2-3 week rally.
The key level you should be watching into Friday's close is $50.42. A close over this level will form the weekly closing price reversal bottom. If buyers are able to take out $52.56 next week then the chart pattern will be confirmed.
Depending on the strength of the short-covering, we could see a fast rally into $54.79. Since the move is likely to be driven by short-covering, we're looking for the rally to stall inside the major retracement zone at $54.79 to $58.95.
Daily January WTI Crude Oil Analysis for Short-Term Traders
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On the daily chart, you can see just how close the market came to collapsing into a potential support zone at $47.96 to $46.00.
You can also see that on the day prices hit $49.41, January WTI crude oil finished higher. This is a potentially bullish closing price reversal on the daily chart.
Furthermore, you can also see that since the top on October 3, the market was unable to produce two consecutive higher-highs and higher-lows until this week. This chart pattern suggests that the trend will change to up on the daily chart if buyers can take out $52.56. This will be the first change in trend to up in nearly two months.
Conclusion
With Russia apparently agreeing to go along with the OPEC-led production cuts, a change in the fundamentals may be close to taking place. The headline was strong enough to entice short-sellers to pare positions. If this news can generate enough upside momentum then we could see a change in trend next week on a breakout through $52.56.
Furthermore, if the January WTI crude oil can close over $50.42 this week, then this could fuel the start of a two to three week, counter-trend rally.
Continuing to make lower-lows will negate the potentially bullish chart pattern.
By Jim Hyerczyk for Oilprice.com
Fundamental and technical analyst with 30 years experience. More