Momentum Is Building For Oil

U.S. West Texas Intermediate crude oil futures are trading higher on Friday with the market hovering slightly below highs not seen since November 21.

The market is being boosted by optimism over the higher-level trade talks between the United States and China that were completed on January 31. Also underpinning the market is strong adherence to the OPEC-led supply cuts during January.

Prices are also being supported on Friday by a stronger-than-expected headline payrolls number that indicates strength in the labor market and solid ISM Manufacturing PMI data, which indicates strong factor demand.

Throughout the week, a number of events fueled a two-sided trade including a tightening of U.S. supply and the announcements of U.S. sanctions against Venezuela. Weak manufacturing PMI data from China also weighed on prices as well as a dovish outlook by the U.S. Federal Reserve.

Positive Spin on U.S. – China Trade Talks

Helping to support prices late in the week is the upbeat tone in the markets following the two-day high level trade talks between the United States and China.

On Thursday, President Trump said he would meet with Chinese President Xi Jinping soon to try to seal a comprehensive trade deal as the top U.S. negotiator reported “substantial progress” in the two days of high-level talks, CNBC said.

OPEC and its Allies are Following Through on Their Pledge

WTI prices rose to a two month high on Thursday after a Reuters poll showed the market is being supported by the OPEC-led supply cuts which began on January 1. The data showed OPEC pumped 30.98 million barrels per day (bpd) in January, down 890,000 bpd from December.

Worries over Supply Disruptions

On Monday, Washington announced export sanctions against Venezuela’s state-owned oil firm PDVSA, limiting transactions between U.S. companies that do business with Venezuela through purchases of crude oil and sales of refined products.

The sanctions aim to freeze sale proceeds from PDVSA’s exports of roughly 500,000 barrels per day (bpd) of crude oil to the United States.

According to reports, so far the sanctions have been mostly disruptive for refiners on the U.S. Gulf Coast, who are being forced to seek alternative heavy crude supplies, and have stepped up purchases of crude oil and sales of refined products. However, investors are concerned about pipeline capacity bottlenecks in Canada.

Bearish traders feel that Venezuelan export volumes will not be eliminated from the market, but rather rerouted to other countries, with China and India likely to pick up the slack at great discounts.

U.S. Energy Information Administration Weekly Inventories Report

(Click to enlarge)

According to the EIA, crude inventories rose 919,000 barrels during the week-ending January 25. The number came in below guesses calling for an increase of 3.2 million barrels.

The bullish news, however, was the surprise drop in gasoline inventories. After eight consecutive weeks of builds to a record high, gasoline stocks fell 2.24 million barrels the week-ending January 25, versus forecasts for a 2.8 million-barrel gain. Distillate stockpiles decreased by 1.12 million barrels, compared to estimates for a decline of 2.0 million.

Weekly Technical Analysis

The main trend is down according to the weekly swing chart. However, momentum is trending higher. The market is in no position to change the main trend to up, however. Furthermore, it’s been six weeks since the multi-year bottom at $42.67, and the market hasn’t even reached 50% to 61.8% percent of the steep decline from October to December.

The minor trend changed to up this week when buyers took out the previous minor top at $54.98. This move shifted momentum to the upside.

The main range is $76.29 to $42.67. Its retracement zone at $59.48 to $63.45 is the primary upside target.

The minor range is $42.67 to $55.37. Its retracement zone is $49.02 to $47.52.

Are We Looking at Short-Covering Or Steady Buying?

The chart pattern is fairly simple. Continuing to post higher highs and higher lows on the weekly chart will keep the minor uptrend and the momentum intact. This means we’re likely to see a steady grind into the main retracement zone at $59.48 to $63.45. Since the main trend is down, sellers are likely to re-emerge on the first test of this zone.

The rally will move with greater upside momentum if there is a major catalyst like a news event. In other words, something has to happen that will scare the short-sellers out of their positions and bring in new buyers. This will likely be positive news related to a U.S.-China trade deal.

Adherence to the OPEC-led production cuts will be the positive news that continues to drive the slow grind into the main retracement zone.

The rally will also move faster if traders are willing to buy strength, but so far it’s difficult to tell if we’re looking at a rally, driven by real buying or gradual short-covering.

The value zone for more conservative buyers is the retracement zone at $49.02 to $47.52. This zone will likely be tested if the U.S.-China trade negotiations go down to the March 1 deadline. If this market is going to move higher over the long-term then buyers will have to come in on a test of this zone in an effort to form a potentially bullish secondary higher bottom.

Forecast

The bullish news continues to pile up which is providing support for prices while generating some upside momentum. However, buyers are likely to remain cautious until they are confident that the U.S. and China can come to terms over a new trade agreement.

There is a March 1 deadline for an agreement, but both parties could extend this deadline if progress is being made. This could be the positive development along with an actual deal that spikes prices to the upside.

Given the nature of the crude oil trade, concrete positive developments over trade could put WTI prices at $59.48 to $63.45 fairly quickly.