Crude Oil Outlook
Oversupply continued to make it hard for crude oil to find a bottom last week although technical analysis factors did manage to help halt the slide at $53.94 at least temporarily. The bottoming action was strong enough to take out the previous day’s high for the first time since November 21. This doesn’t mean much to the big picture, but prolonged short-covering rallies have started from this simple chart formation.
Other than bouncing off a five-year low, the crude oil market was very tame this week. Volatility was low and the price action was orderly. This may be a sign that we are close to a bottom since a volatile market typically indicates there are large buyers still coming in to disrupt the selling process. In other words, the weak buying this week may have been the proverbial “throwing in the towel” for the last of the bottom-pickers.
This is a good development because it may mean the market may be coming close to running out of buyers which usually triggers the start of a short-covering rally. The shorts tend to panic because they have no one left to sell to in order to perpetuate the downtrend. This then causes them to buy back previously sold contracts in an aggressive fashion.
As I mentioned last week, this market isn’t going to bottom and turn higher because of a big buyer, it will do so because the shorts will decide to cover when they finally decide the risk of holding a short position…