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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Downward Momentum Is Building For Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday amid an escalation of geopolitical events that have raised concerns over the strength of the U.S. economy and future demand. Crude oil is in a position to post its biggest monthly loss since November as trade conflicts spread throughout the globe and U.S. crude production returned to record levels.

Escalating Global Trade Concerns

The U.S. trade dispute with the world escalated on Thursday when President Trump vowed to slap tariffs on all goods from Mexico. This news drove U.S. Treasury yields sharply lower and pressured demand for higher risk assets as investors increased bets that we’re headed into a global economic slowdown or perhaps a recession that could lead to a drop in demand for crude oil.

U.S. Production Rises

Crude oil prices are also being pressured by a much smaller-than-expected decline in U.S. stockpiles. Additionally, the government reported that production returned to its record 12.3 million barrels per day.

On Thursday, the EIA said U.S. crude stocks fell by around 300,000 barrels during the week-ending May 24, to 476.49 million barrels. Traders were looking for a draw of about 900,000 barrels. Late Wednesday, the American Petroleum Institute (API) reported a 5.3 million barrel decline.

Saudis Raise Production

According to a Reuters survey, top oil exporter Saudi Arabia raised production in May, however, this was not enough to compensate for lower Iranian exports, caused by expanded sanctions by the U.S. against the rogue nation.

A Sliver of Bullish News

Without question, crude oil prices have been supported since the first of the year by the OPEC-led production cuts and the U.S. sanctions on Venezuela and Iran.

Earlier in the week, OPEC and its allies indicated the production cuts would be extended in a meeting next month. Additionally, Russia will carefully consider extending its oil output reduction agreement with OPEC, Russian First Deputy Prime Minister Anton Siluanov told Reuters earlier in the week.

Furthermore, Kuwait’s oil minister Khaled al-Fadhel suggested OPEC is not in a rush to ease supply restraint ahead of the mid-year meeting. He said the market was expected to be in balance.

“We still have some more work to do. I believe the market is expected to be balanced during the 2nd half of 2019, more towards the end of the year, Al Fadhel told Reuters.

Technical Analysis

Weekly July West Texas Intermediate Crude Oil Technical Analysis

The main trend is down according to the weekly swing chart. The trend turned down the week-ending May 24, it was reaffirmed this week when sellers took out the $55.80 main bottom.

The trend will turn up on a move through $63.96. However, this is highly unlikely. If there is going to be a turnaround, it will likely be fueled by a potentially bullish closing price reversal bottom. In layman terms, a lower-low on the weekly chart, followed by a higher close.

The main range is $75.20 to $44.20. Its 50% to 61.8% retracement zone at $59.70 to $63.36 is resistance. Trading on the weak side of this zone is a bearish sign. This zone is controlling the longer-term direction of the market.

The minor range is $44.20 to $66.44. Its retracement zone at $55.32 to $52.70 is the next downside target. Although the main trend is down, this area could represent value to some aggressive buyers. Therefore, we’re going to watch for counter-trend buyers on a test of this area.

Weekly July West Texas Intermediate Crude Oil Forecast

Based on this week’s price action and the current price at $54.95, the direction of the July West Texas Intermediate crude oil market next week is likely to be determined by trader reaction to the minor 50% level at $55.32.

Bearish Scenario

A sustained move under $55.32 will indicate the selling pressure is getting stronger. This could lead to a test of the 61.8% level at $52.70. Watch for a technical bounce on the initial test of $55.32 to $52.70 since it is an attractive value area. If $52.70 fails as support then look for the selling to possibly extend into the uptrending Gann angle at $49.95.

Bullish Scenario

A sustained move over $55.32 will signal the presence of counter-trend buyers. Overcoming the uptrending Gann angle at $55.70 will indicate the buying is getting stronger, or the selling weaker. This could trigger a rally into the downtrending Gann angle at $57.70. If this move creates enough upside momentum then look for a rally into the major 50% level at $59.70.

Weekly August Brent Crude Oil Technical Analysis

The main trend is down according to the weekly swing chart. The trend turned down this week when sellers took out the main bottom at $64.12. The trend will change to up on a trade through $73.95.

The main range is $83.30 to $51.90. Its retracement zone at $67.60 to $71.31 is resistance. Trading on the weak side of this zone is producing a bearish tone.

The minor range is $51.90 to $73.95. Its retracement zone at $62.93 to $60.32 is the primary downside target. We could see a technical bounce on the first test of this zone if aggressive, counter-trend buyers determine this area represents value.

Weekly August Brent Crude Oil Weekly Forecast

Based on this week’s price action and the current price at $63.85, the direction of the August Brent crude oil market next week is likely to be determined by trader reaction to the uptrending Gann angle at $63.40.

Bullish Scenario

A sustained move over $63.40 will indicate the presence of buyers. If this move can create enough upside momentum then look for the rally to extend into the downtrending Gann angle at $65.80. Since the main trend is down, sellers are likely to come in on a test of this angle.

Overtaking $65.80 will indicate the buying is increasing. This could lead to a test of the main 50% level at $67.60.

Bearish Scenario

A sustained move under $63.40 will signal the presence of sellers. This should lead to a test of $62.93. If this level fails then look for a potential acceleration to the downside with $60.32 the next target.

Watch for counter-trend buyers on the first test of $62.93 to $60.32, but if the latter fails then look for the selling to possibly extend into the uptrending Gann angle at $57.65.

Conclusion

Both WTI and Brent crude oil are rapidly approaching key value areas. However, geopolitical news and concerns about the global economy is driving the price action. Unless there is an improvement in the global economic data, or the U.S. and China announce that trade talks are back on, buying is going to be limited inside these zones. Furthermore, technical bounces aren’t likely to last. We’d like to see support bases form inside these zones before committing to the long side once again. Nonetheless, expect to see speculative buyers playing the long side on tests of these value zones.


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