Weekly Crude Oil Analysis
The short-term picture for November crude oil futures turned a little rosier after prices consolidated for a third week. Some of the buying was related to profit-taking following the prolonged move down in price and time, some was fueled by geopolitical concerns, but most of the buying appears to be related to another drawdown in inventory.
Technical factors may have contributed to the profit-taking. Given the range created by the July 2012 bottom at $82.07 to the June 2014 top at $104.44, a major retracement zone has been created at $93.26 to .90.62. Although the market broke to $89.56 the week-ending September 12, most of the recent price action has taken place inside the retracement zone. This area appears to be attracting both profit-taking and aggressive counter-trend buying.
Earlier this week, a U.S.-led coalition began air strikes in key areas of Syria. Although the aggressive military action did not directly affect supply, enough counter-trend buying came in on the news to give crude oil futures a boost.
The inability to break the market lower this week suggests there may be enough speculative interest on the long side of the market to prop it up over the short-term. Keep in mind that these speculators tend to grow impatient if something to drive prices higher doesn’t occur quickly enough to help their cause. However, since this is an active geopolitical event, they may stick around long enough to see if escalates into something that causes supply disruptions.
Because of the size and length of this current sell-off in crude oil, it is going to take more than a chart pattern and a speculative event to rattle the short hedge and commodity fund traders. What usually makes these professional traders sit up and take notice is an actual shift in the supply and demand fundamentals. This line of thinking received some support this week after a government report showed West Texas Intermediate crude oil supplies dropped to an eight-month low.
According to the Energy Information Administration, U.S. crude oil supplies fell 4.27 million barrels last week. Traders had priced in an increase. Most importantly to crude oil futures traders, volume traded above the 100-day average, suggesting that buyers may be coming back into the market.
Before getting too excited about the upside potential of crude oil, keep in mind that the long-term fundamentals remain bearish. Over the short-run, however, it looks as if the market is ripe for a strong short-covering rally. Although supply is at an eight month low, production remains high and demand low. A drop in imports may be the main reason for the overall drop in supply. This may not be sustainable over the long-run.
Last week, U.S. crude production rose to 8.87 million barrels, according to EIA estimates. That’s the highest level since 1986. Demand is down because of the slow economic recovery in the U.S. and the slower economic growth in Europe and China. A drop in imports of 1.24 million barrels a day to 6.87 million last week, the lowest level since May, may have been the main reason for the inventory drawdown.
This week, a combination of technical and fundamental factors may trigger a short-covering rally in the crude oil market. The price action is still suggesting trader uncertainty as if traders are waiting for a catalyst to encourage some of the shorts to begin bailing out of their long-term positions. This catalyst may be the geopolitical events in the Middle East. Another decline in supply this week could also drive the market higher at least over the short-run.