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Oil Stabilizes On Small Crude Draw

Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Trend Should Remain Up Despite Trader Indecision

June Crude Oil futures posted an inside move last week. This reflected trader indecision or that traders are waiting for fresh information. There was very little reaction this week to the supply and demand reports. Traders seemed to be more focused on the escalating situation in Yemen.

After posting a solid gain the week-ending April 17, crude oil futures settled into a sideways-to-lower trade. The inability to follow-through to the upside after the strong rally gave investors an excuse to pare positions. This led to a steady decline throughout the week. It also was an indication that traders were looking for blow-out news and seemed to be ready to move on from the basic weekly supply and demand data.

The price action from a trader’s perspective was quite normal. With U.S. production expected to continue to decline, it’s just a matter of time before this gets reflected in the supply and demand data. The price action also seems to be saying that now that a slight uptrend has been established, investors may be more willing to buy value than to buy strength.

In other words, during this uptrend buyers are likely to come in on the dips. Any spike moves to the upside will likely be triggered by surprise news and short-covering. This assessment was confirmed on Thursday when crude oil spiked higher on renewed fighting in Yemen.

Last week’s early selling pressure may have been caused by the news that Saudi-Arabia was ending its military campaign in Yemen. Also contributing to the weakness was sluggish global demand. Overbought conditions from a technical perspective may have also contributed to the selling pressure.

The weekly EIA report didn’t provide any help for bullish traders. This report showed U.S. crude stockpiles rose by 5.3 million barrels. This was higher than the 2.9 million barrel estimate. Total stocks were pushed up to 489 million barrels, an 80-year high.

The markets were difficult for traders on both the long and short side. This was reflected by the inside move on the weekly chart. This occurs when the buying isn’t strong enough to take out the previous week’s high or the selling isn’t strong enough to break through the previous week’s low.

This chart pattern indicates trader indecision, but it also suggests impending volatility. Since the main trend is up on the weekly chart, there is a slight bias to the upside. The way of least resistance is also to the upside. This suggests that traders should be focusing on the long side of the market for the biggest potential move. The catalyst for an upside breakout and more short-covering is likely to be an event like an escalation of military activity in Yemen.

Since the supply/demand situation appears to be under control at least in the short-run, crude oil may become event driven. This is usually when the speculators show up. As mentioned earlier, investors are likely to come in on the breaks during an uptrend, but speculators will buy when there is a bullish fundamental event.

Last week, the Saudi’s said they were going to end military activity in Yemen. This didn’t sit well with Washington which believes that there is still more work to be done to prevent the Iranian-backed rebels in Yemen from affecting supply. Traders didn’t like the news either, leading to weakness earlier in the week. At mid-week, the Saudi’s appeared to have changed their minds when they renewed fighting in Yemen. On Thursday, crude oil spiked higher when the fighting escalated.

jim1

If we use last week’s price action as our blueprint, we should see short-term corrections into value areas since investors will be focusing on the supply/demand reports. Price spikes will be caused by outside events, triggering short-covering rallies and encouraging fresh speculative buying. Overall, the trend should remain up. The weekly June Crude Oil chart pattern suggests that $69.92 is still a reasonable upside target.





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