September West Texas Intermediate Crude Oil futures struggled on the upside from the start and are likely to finish lower for the week. The selling started on Tuesday after the long U.S. holiday weekend amid signs of a resurgence in Libya’s output and on concerns that the OPEC-led production cuts may not be enough to trim the global supply glut.
According to the chief of the state-run National Oil Corporation, Libya’s oil production was at 784,000 barrels per day (bpd) because of a technical issue at the Sharara field, but was expected to start rising to 800,000 bpd.
Sellers were also reacting to the news from energy services firm Baker Hughes, which reported that U.S. drillers had added oil rigs for the 19th straight week, bringing the number of rigs operating in the United States to 722, the highest level since April 2015.
Adding to the bearish news was a new report from Goldman Sachs, calling for lower oil prices if falling production costs kept supply rising for years to come. According to the bank, once OPEC’s production growth resumes after its self-imposed cuts, U.S. and OPEC output would rise by 1 million to 1.3 million bpd between 2018 and 2020. This report seemed to be the blueprint followed by traders most of the week.
Bullish traders tried to build support for prices by bringing up the possibility of increased demand due to the start of the U.S. summer driving season.
Prices continued to slide in mid-week, taking out last week’s low on concerns over U.S. production. According to the latest data, U.S. output climbed to more than 9.3 million bpd, close to top producers Saudi Arabia and Russia.
By the end of the session on Wednesday, short-sellers had had enough and began to cover their positions as the market neared technical support levels. Helping to support a short-covering rally was a report from the American Petroleum Institute (API).
According to the API, U.S. crude inventories fell by 8.7 million barrels to 513.2 million in the week-ended May 26. Analysts were looking for a decrease of only 2.5 million barrels.
The short-covering rally was further supported early Thursday after a government report showed a larger-than-expected draw in U.S. inventories.
The U.S. Energy Information Administration reported a 6.4 million barrel drop in crude inventories. This was more than the 4.4 million-barrel drop forecast. Traders said the draw in U.S. inventories was driven by a surge in refining and exports to record highs. Gasoline inventories also dropped sharply.
The price action this week suggests that crude oil traders have moved on from the OPEC-led production cut agreement and that their focus has shifted to the monthly and weekly supply and demand reports. Due to the nature of these reports, we’re likely to see a rangebound trade, highlighted by periodic, volatile two-sided trades. We’re likely to see this type of trading until investors can overcome the skepticism that OPEC-led cuts will be enough to rebalance an oversupplied market.
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The main trend is down according to the weekly swing chart. The main trend will turn up on a trade through the last swing top at $54.77.
This week, a new minor top was formed at $52.38. A trade through this level will change the minor trend to up. This move will also indicate that a secondary higher bottom may be forming. This would be potentially bullish.
In the meantime, we have to look at this week’s downside momentum because it indicates that another potentially bearish secondary top may be forming at $52.38. Given the fundamentals and the price action, in this case, we have to say that the trend is our friend so it’s better to play the short-side of the market until proven otherwise.
Retracement zone and levels also played a role in the recent price action.
The main range is $58.36 to $44.76. Its retracement zone is $51.56 to $53.16. Last week, this zone provided resistance when crude oil hit its high at $52.38.
The intermediate range is $54.77 to $44.76. Its retracement zone is $49.77 to $50.95. This week’s high at $50.46 fell inside this zone.
The new short-term range is $44.76 to $52.38. Its retracement zone at $48.57 to $47.67 is the primary downside target. As of Thursday’s close, the market was trading inside this zone.
Trader reaction to the primary downside target zone will determine the direction of the market next week. In keeping with the theme of a sideways trade over the near-term, aggressive counter-trend buyers could step in on a test of the $48.57 to $47.67 retracement zone. They are going to try to shift momentum to the upside with the formation of a new secondary higher bottom.
Trend-trading sellers are going to try to drive the market through $47.67 in an effort to create enough downside momentum to challenge the May main bottom at $44.76.
Keep an eye on the price action and read the order flow on a test of $48.57 to $47.67. Trader reaction to this zone will tell us if buyers are taking control.