Are Crude Inventories On The Cusp Of Decline?

The strong performance on Thursday has put crude oil in a position to finish the week at a three-week high. The week began with the market being underpinned by reports that OPEC and non-OPEC members had gathered in Kuwait last weekend to discuss the possibility of extending the program to reduce output.

Later in the week, the rally began to pick up more support after Libya reported supply disruptions. The short-covering rally continued on Wednesday after the U.S. Energy Information Administration (EIA) reported an inventory build that was smaller than expected.

Oil prices surged for a third day on Thursday after reports surfaced that Kuwait gave its backing for an extension of OPEC production cuts. Speculators are also betting that Saudi Arabia will roll over its production cuts for another six months starting in July.

Later in the week, there were also reports that Russia may be gradually reducing production, bringing it closer to the 300,000 barrel per day output cuts that it had promised.

Fresh data from the U.S. Energy Information Administration (EIA) showed crude oil inventories rose 867,000 barrels in the week-ending March 24. This figure was nearly half of the 1.2 million barrel build that was expected. Traders attributed the lower build to ramped up processing by refineries after seasonal maintenance. Additionally, imports dropped and exports rose.

Fears of oversupply will continue to hang over the market but this week's news is enough to drive the market away from recent lows. U.S. crude stocks are still near a record high. This should keep a lid on the rally. Therefore, I'm looking for the market to settle into a range above last week's low and below the previous bottoms.

Technical Analysis

Weekly June West Texas Intermediate Crude Oil

Despite the prolonged sell-off since late December the longer-term trend is up because of the series of higher tops and higher bottoms. The momentum may be trending lower, but that is a result of the size of price swings. Large swings up tend to lead to large swings down, but the trend remains up until a bottom is taken out.

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The weekly swing chart clearly shows the series of higher bottoms at $41.32, $44.46 and $46.25. The recent low is $47.58. If the rally continues then this price will also become a new higher bottom.

On the upside, higher tops are $46.20, $54.00, $54.50 and $57.95. The latter is the longer-term upside target. If this price is ever taken out then crude oil could easily recapture the psychological $60.00 level.

Swing chart analysis also tells us that the main range is $36.18 to $57.95. Its retracement zone at $47.07 to $44.50 is the primary downside target. This zone represents value. Buyers recently came in at $47.58 to defend the trend. However, I think value-seeking buyers would have come in on a test of this zone.

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The short-term range is $57.95 to $47.58. Its retracement zone is $52.77 to $53.99. This zone is the primary upside target.

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The EIA report also helped U.S. gasoline futures surge more than 2 percent to their highest in three weeks. It was helped by the inventories report that showed a 3.7 million-barrel drop in gasoline stocks last week, nearly 2 million barrels more than forecast.

After attracting buyers slightly above a major retracement zone at $1.5791 to $1.5030, gasoline formed a new main bottom at $1.5908.

The new short-term range is $1.9012 to $1.5908. If the rally continues then its retracement zone at $1.7460 to $1.7826 will become the primary upside target. Since the main trend is down, sellers are likely to come in following a test of this zone.

Conclusion

Although Libyan oil output is dropping about 500,000 barrels per day (bpd) due to the shutdown of pipelines from its biggest producing field, buyers have been a little tentative about playing the long side aggressively due to concerns over U.S. crude supply. Nonetheless, this week's price action shows that short-sellers are retreating, giving speculators room to inch this market higher until they run into the next major resistance.

I think the news has been strong enough to suggest support has been established and Wednesday's EIA report means that bullish traders have dodged another bullet for at least a week. Additionally, the steep drop in gasoline inventories, coming at the end of the refinery maintenance season, likely means crude oil inventories are on the cusp of declining. If this proves to be true then investors are going to shift their focus on OPEC and its ability to persuade its members and non-members to extend the output production program.

Crude Oil

Our chart work strongly suggests that crude oil and gasoline have reached short-term bottoms. The current news events are helping to create upside momentum.

If the upside momentum is strong enough then June WTI crude oil should see a near-term move into $52.77 to $53.99.

Besides being a technical retracement zone, it also overlaps a number of old lows. This is important because old lows tend to become new highs.

Look for June WTI crude oil to continue to be supported by short-covering and bullish news stories, but for bearish traders to retake control on a test of $52.77 to $53.99.

Gasoline

The weekly chart indicates the main trend is up and momentum is trending higher. If the upside momentum continues then we expected to see a move into $1.7460 to $1.7826 over the near-term.