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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Long Speculator Exodus Sinks Crude Oil

U.S. West Texas Intermediate crude oil futures are inching higher on Friday, but a steep sell-off earlier in the week has solidified a weekly lower close.

In case you haven’t noticed, there was a dramatic shift in sentiment in the market this week. This was caused by the departure of a couple of events that had been supporting the market over the short-term like the hurricane in the Gulf of Mexico that shut down production last week and the elevated tensions in the Middle East that had been underpinning prices for several weeks.

Buyers put in a premium for Hurricane Barry, but other than halting production for a couple of days, the storm did little to disrupt supply. Buyers also drove prices higher after an Iranian navy vessel taunted a British tanker. Once again, since there was no supply disruption, speculative buyers were forced to liquidate.

The bearish surprise for bullish investors earlier in the week was the announcement that Iran was willing to talk with the U.S. about its nuclear missile program. The second surprise for the bulls was the jump in crude oil products inventories on Wednesday, according to a government report. Sellers also gained controlled on reports of increasing U.S. shale production.

At the end of the week, all we can determine is prices are being propped up by the OPEC-led supply cuts. And if you believe the demand figures from OPEC and the International Energy Agency, these cuts are likely to be offset by the rising U.S. production unless OPEC and its allies cut further.

US Stockpiles of Products Pressure Prices

U.S. crude inventories fell 3.1 million barrels, the weekly EIA report showed, but this came in line with expectations with some analysts predicting a decrease of 2.7 million barrels, and others forecasting a 3.6 million barrel draw.

However, gasoline stocks rose 3.6 million barrels, compared with analysts’ expectations for a 925,000-barrel drop. Distillate stockpiles grew by 5.7 million barrels, much more than expectations for a 613,000-barrel increase, the EIA data showed.

Late Week Bid, but Still Bearish

Prices were supported a little on Friday amid renewed tensions between the United States and Iran, but all this means so far is speculative buyers are attempting to take back some of those earlier losses. It also indicates that we’re not likely to see a prolonged rally unless military action stops the flow of oil from the region.

The United States said on Thursday that a U.S. Navy ship had “destroyed” an Iranian drone in the Strait of Hormuz after the aircraft threatened the vessel, but Iran said it had no information about losing a drone.

In other potentially bearish developments, the International Energy Administration (IEA) is revising its 2019 oil demand growth forecast to 1.1 million barrels per day (bpd) and may cut it again if the global economy and especially China shows further weakness, EIA Executive Director Fatih Birol said. Last year, the IEA predicted that 2019 oil demand would grow by 1.5 million bpd but had already cut the growth forecast to 1.2 million bpd in June this year.

Technical Analysis

Weekly September West Texas Intermediate Crude Oil Technical Analysis

The main trend is down according to the weekly swing chart. A trade through $64.02 will change the main trend to up. This is followed by another main top at $64.92. A move through $50.91 will signal a resumption of the downtrend. This could lead to an eventual test of the next main bottom at $44.66.

The minor trend is also down. It turned down when $56.13 failed as support. The new minor top is $61.02. The weak price action also means that momentum has shifted to the downside after strengthening since the week-ending June 7.

The main range is $74.44 to $44.66. Its retracement zone at $59.55 to $63.06 is resistance. This zone stopped the rally the week-ending July 12 at $61.02.

The minor range is $44.66 to $65.92. Its retracement zone at $55.29 to $52.78 is the next downside target. The upper or 50% level of this range at $55.29 is currently being tested.

Weekly Forecast

After this week’s long liquidation, traders are looking for a balance area. The OPEC cuts remain supportive and the situation in the Middle East is still hot. Although the US and Iran are scheduling talks, the two sides are likely wide apart so nothing may get accomplished during this first round of discussions.

The wildcard is US-China trade relations. Reports say the two sides aren’t making any progress and may be hung up over the US treatment of Chinese communication Huawei. If the talks break off then tensions over lower demand will rise again, and we’re likely to see another round of selling pressure on global economic growth concerns.

Technically, based on this week’s price action the direction of the September WTI crude oil market next week is likely to be determined by trader reaction to the 50% level at $55.29.

Bearish Scenario

A sustained move under $55.29 will indicate the presence of sellers. If this move creates enough downside momentum then look for the market to possibly accelerate into the Fibonacci level at $52.78. We could see a technical bounce on the first test of this level, but if it fails then prices could plunge further into the main bottom at $50.91.

Bullish Scenario

A sustained move over $55.29 will signal the return of buyers. This could trigger some light short-covering unless the move is event driven. If there is bullish news then we could see a rally back to $59.55.

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