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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Are Markets Turning Bearish On Crude?

Oil Pump

Volatility dominated the crude oil futures markets this week as traders were hit with both potentially bullish and potentially bearish news. Traders reacted according, first driving prices higher than lower. The price action suggests that this week’s close will determine the near-term direction of the market.

The week started with Brent crude oil futures spiking to its highest level in 2 ½ years on Monday on news that a major pipeline in the U.K.’s North Sea will shut down for repairs.

According to reports, the Forties pipeline system will close for several weeks while its operator, INEOS, repairs a crack in a pipe discovered last week. The pipeline is responsible for about 450,000 barrels a day of Forties crude from offshore fields in the North Sea to a processing plant in Scotland.

INEOS’ decision to close the Forties pipeline came as a surprise and helped drive Brent crude prices higher than initially expected. Many crude oil traders had expected INEOS to keep the pipeline running at reduced rates while it repaired the crack.

“Despite reducing the pressure the crack has extended, and as a consequence the Incident Management Team has now decided that a controlled shutdown of the pipeline is the safest way to proceed,” INEOS said in a statement on Monday.

West Texas Intermediate crude oil also rose on the news, but the spread widened between Brent and WTI. Although investors thought the news would drive prices higher over the near-term, the rally was over within a day due to increasing concerns over rising U.S. production.

On Wednesday, U.S. West Texas Intermediate and international-benchmark Brent crude oil declined for a second day as a drawdown in U.S. crude stockpiles was offset by a larger-than-forecast rise in gasoline stocks and as U.S. crude oil production continued to climb to record highs.

According to the U.S. Energy Information Administration, U.S. crude inventories dropped 5.1 million barrels the week-ending December 8, more than the estimated 3.8 million barrel draw. However, this potentially bullish news was offset by a 5.7 million barrel jump in gasoline stocks, which was more than double analysts’ expectations for a 2.5 million-barrel gain.

U.S. production also hit another record high at 9.78 million barrels per day (bpd), EIA data showed. The U.S. peak, when records were only kept on a monthly basis, is 10.04 million bpd, set in November 1970.

On Thursday, prices retreated early in the session before recovering into the close and continuing the rally early Friday.

The sell-off on Thursday was triggered by bearish reports from OPEC and the International Energy Agency (IEA).

The IEA raised its U.S. crude output growth forecast for 2018, saying it would climb by 870,000 barrels per day (bpd) compared with its November forecast of 790,000 bpd.

The IEA also said it expects the oil market to have a surplus of 200,000 bpd in the first half of next year before reverting to a deficit of about 200,000 bpd in the second half. This would mean 2018 overall would show “a closely balanced market.”

OPEC also revised its estimate for U.S. oil output growth for 2018 to 1.05 million bpd, while the U.S. Energy Information Administration increased its growth forecast to 780,000 bpd.

Forecast

If we assume that the Forties shutdown is providing a floor for the market then we have to assume that rising U.S. production is providing a cap. However, this may not be the case if the hedge funds start liquidating their long positions.

The market may have priced in the possible loss of 450,000 barrels per day of Forties crude, however, I don’t think investors have priced in the possible impact of further increases in U.S. production. WTI prices haven’t moved much in a month. This may change if the hedge funds decide they want to keep their money out of a sideways market and put it to work in another market that is trending.

It looks like the battle between short-term bullishness (the Forties event) and the long-term bearishness (rising U.S. production) may hold the WTI and Brent crude oil in a range. However, the weekly close may actually tell us how investors really feel about the market.

After posting a 2 ½ year high earlier in the week, Brent crude oil is trading lower as of Friday. A lower close for the week could send a bearish signal to traders. This type of price action tends to indicate the selling is greater than the buying at current price levels and this often leads to a 2 to 3 week correction.

Weekly Brent Crude Oil Technical Analysis

(Click to enlarge)

March Brent crude oil hit a high this week at $64.92. As of Friday, it was trading $62.74. A close below $63.03 will produce a potentially bearish closing price reversal top.

If this chart pattern forms and there is a confirmation next week then we could see the start of a 2 to 3 week correction with $57.60 the initial target.

Weekly West Texas Intermediate Crude Oil Technical Analysis

(Click to enlarge)

February WTI crude oil did not make a new high this week, therefore, it is not in a position to post a closing price reversal top. However, it is in a position to close lower for the third straight week.

The key support is a long-term Fibonacci level at $55.94. A sustained move under this level will signal the presence of sellers. If sellers come in to drive the market through this level then look for a minimum decline into an uptrending Gann angle at $54.92, followed by a 50% level at $54.46.




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