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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Oil Is Gaining Momentum As Bullish Forces Increase

U.S. West Texas Intermediate oil futures are trading higher early Friday and in a position to post a gain for the week despite the release of a second report calling for a supply glut in 2020. The price action suggests that supply worries are outweighing demand concerns.

Affecting the supply side are a tropical storm in the Gulf of Mexico and heightened tensions in the Middle East. Also helping to generate some upside momentum is another large drawdown in U.S. stockpiles.

Oil Rigs Evacuated Ahead of Storm

Fifteen production platforms and four rigs were evacuated in the north central Gulf of Mexico, according to a U.S. regulator.

According to the latest reports, oil companies in the Gulf of Mexico had cut more than 1 million barrels per day (bpd) of output, or 53% of the region’s production, due to Tropical Storm Barry which could make landfall Saturday on the Louisiana coast.

Iran Creates Disturbance with Britain

Three Iranian vessels tried to block the passage of a British ship run by BP through the Strait of Hormuz, the British government said. They withdrew after warnings from a British warship. Although prices rose in response to the news, apparently the event was anticipated after Iran warned Britain would face “consequences” over the seizure of an Iranian oil tanker.  

U.S. Government Reports Another Big Draw

On Wednesday, the U.S. Energy Information Administration (EIA) reported crude stocks fell 9.5 million barrels in the week to July 5. Traders were looking for a 3.1 million-barrel draw. Traders said the decline was caused by ramped up refinery output. This also marked the fourth consecutive weekly decline.

Renewed Demand Concerns

Keeping a lid on prices are two independent reports calling for lower demand.

On Thursday, OPEC said the world would need 29.27 million bpd of crude from its members in 2020, down 1.34 million from this year.

Early Friday, the International Energy Agency (IEA) expects the return of an oversupplied oil market next year, despite the OPEC-led pact designed to cut production and stabilize prices.

The IEA said the “main message” of its closely-watched report was that oil supply in the first six months of 2019 had exceeded demand by 0.9 million barrels per day.

“This surplus adds to the huge stock builds seen in the second half of 2018 when oil production surged just as demand started to falter,” the IEA said.

“Clearly, market tightness is not an issue for the time being and any rebalancing seems to have moved further into the future.”

“The widely-anticipated decision by OPEC+ ministers to extend their output agreement to March 2020 provides guidance but it does not change the fundamental outlook of an oversupplied market,” the IEA said.

Technical Analysis

Weekly September WTI Crude Oil Technical Analysis

The main trend is down according to the weekly swing chart, but the upside momentum is getting stronger. The main trend will change to up on a trade through $64.02. This is followed closely by another main top at $65.92. A trade through $50.91 will signal a resumption of the downtrend.

The minor trend is up. It changed to up earlier this week when buyers took out last week’s high at $60.32. This move confirmed the shift in momentum to the upside. The minor trend will change to down on a move through $56.13.

The short-term range is $44.66 to $65.92. Its retracement zone at $55.29 to $52.78 is support.

The main range is $74.44 to $44.66. Its retracement zone at $59.55 to $63.06 is currently being tested. This zone is controlling the longer-term direction of the market.

Weekly Forecast

The demand concerns are a longer-term issue. The potential supply concerns due to the approaching tropical storm are a real short-term problem. Therefore, unless the weather conditions suddenly improve and production resumes, this story is likely to drive the price action over the short-term.

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 main 50% level at $59.55.

Bullish Scenario

A sustained move over $59.55 will indicate the presence of buyers. If this move creates enough upside momentum the look for the current rally to extend into the main Fibonacci level at $63.06. This is a potential trigger point for a breakout to the upside with the next targets the two main tops at $64.02 and $65.92.

Bearish Scenario

A sustained move under $59.55 will signal the presence of sellers. If this move generates enough downside momentum then look for a retest of the minor bottom at $56.13. Taking out this level will shift momentum to the downside. This could lead to a test of $55.29 to $52.78.

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