Crude oil futures traders experienced high intraday volatility and a two-sided trade most of the week as expectations of an OPEC deal to limit production helped underpin the market and oversupply concerns and a strong U.S. Dollar limited the rallies.
To recap the week, January crude oil futures closed lower on November 14 after falling to their lowest levels in three months. Prices were pushed lower early in the week due to oversupply concerns. Additionally, data from the InterContinental Exchange showed investors cut their long positions by the largest weekly amount on record. This information alone made the market ripe for a turnaround.
Trading conditions changed quickly with oil prices jumping nearly 6 percent on November 15 on expectations that OPEC will agree later this month to cut production to reduce the supply glut.
Triggering the massive short-covering rally was a report from Reuters that said Saudi Energy Minister Khalid al-Falih was expected to travel to the Qatari capital, Doha, this week for meetings with oil-producing countries on the sidelines of an energy forum.
This meant that OPEC could start its official meeting on November 30 in Vienna with a structured deal to limit output in place, increasing the chances the meeting will end with a signed, sealed and delivered agreement.
More volatility and two-sided trading hit the oil market on November 16 as supporters of the OPEC deal, which represents the “future”, clashed with traders following the traditional supply and demand fundamentals, or those traders reacting to the “now”.
Oil prices firmed early after Russia said it was ready to support OPEC’s decision on an oil output freeze. The idea was supported by comments from Russian Energy Minister Alexander Novak who said he sees big chances that the oil producers’ group can agree on the terms of the freeze by November 30.
However, the rally failed and the market plunged after the U.S. Energy Information Administration said crude inventories rose for a third straight week and increased by a larger-than-expected 5.3 million barrels last week, exceeding analyst forecasts calling for a 1.5 million-barrel build.
Volatility was still the theme on November 17, when an attempt to breakout to the upside on rising expectations of an OPEC deal to limit production was thwarted by oversupply concerns and huge surge in the U.S. Dollar.
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January Crude Oil futures are in a position to finish the week higher despite this week’s series of volatile sessions.
The main trend is down, but momentum may be shifting to the upside. Not only has the market crossed to the strong side of a major retracement zone, but it is also in a position to post a potentially bullish closing price reversal bottom.
The main range is $34.55 to $53.72. Its retracement zone is $44.14 to $41.87. This zone provided support on November 14 when the market reached its low for the week at $42.95 and rallied back to $47.12.
If the futures contract closes over $44.15 on Friday then this will form a closing price reversal bottom. This chart pattern doesn’t mean the trend is changing to up, but that the buying is greater than the selling at current price levels. This could trigger the start of a 2 to 3 week rally equal to at least 50% to 61.8% of the current break.
The new short-term range is $52.74 to $42.95. If there is a confirmation of the reversal chart pattern then its retracement zone at $47.85 to $49.00 will become the primary upside target.
Based on this week’s price action, the direction of the January Crude Oil market next week will be determined by trader reaction to a downtrending angle at $46.74 and an uptrending angle at $45.55.
Taking out $46.74 with conviction will signal the presence of buyers with the next major target coming in at $47.85. This followed by a Fibonacci level at $49.00 and a downtrending angle at $49.74.
If $45.55 fails as support then look for a possible break into the major 50% level at $44.14. Taking out this level could trigger a further break into $42.95 and a Fibonacci level at $41.87.
Looking at the bigger picture, this week’s sustained move over the major 50% level at $44.14 is helping to give crude oil an upside bias. This means that investors are betting that OPEC will reach a deal to curb production.
If investors weren’t sure then the market would be trading at $44.14.
If investors feel that a deal is not likely then crude oil will break below $44.14.
In conclusion, trader reaction to $45.55 and $46.74 will determine the short-term direction of the market. However, longer-term investors should watch the price action and read the order flow at $44.14.