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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Are Oil Markets Ready To Rally Again?

OIl

U.S. West Texas Intermediate and internationally-favored crude oil futures are trading higher for the week as investors prepared for the release of weekly inventories data from the U.S. Energy Information Administration (EIA) on Thursday.

Oil prices rose for a third day on Wednesday as OPEC forecast higher demand for 2018 and on heightened tensions in Kurdistan supported prices.

December WTI Crude Oil settled at $51.60 on Wednesday, up $1.95 for the week or 3.93% and January Brent Crude Oil closed on Wednesday at $56.73, up $1.37 for the week or 2.47%.

In addition to forecasting stronger demand for its oil in 2018, OPEC said production cuts by producing nations were cleaning up the global crude glut.

In other news, Saudi Arabia said it pumped 9.97 million barrels per day in September, up from August, but still below target.

Brent vs West Texas Intermediate

Traders are still watching the spread between Brent crude oil and WTI crude oil. The North Sea Brent benchmark last week hit its highest premium over WTI in two years, making U.S. crude increasingly competitive in foreign markets.

Last week, the EIA said crude exports jumped to 1.98 million barrels per day, surpassing the 1.5 million bpd record set the previous week. Traders said the jump in U.S. exports points to growing demand and the rising profile of the United States as a major supplier of crude and products around the world.

This week, the world’s second largest crude trader Glencore said the market can absorb the volumes along with those from the North Sea and West Africa.

“I think the market is able to absorb that 2 million bpd of U.S. exports easily,” Glencore’s head of oil trading Alex Beard told the Reuters Global Commodities Summit. “I don’t think there are many losers out there.”

American Petroleum Institute (API) and Energy Information Administration (EIA)

Late Wednesday, the API said its data showed U.S. crude stocks rose unexpectedly last week, while gasoline inventories decreased and distillate stocks increased.

According to the API, crude inventories rose 3.1 million barrels in the week to October 6. Analysts had expected a draw of 2 million barrels.

The EIA report on Thursday is expected to show a 1.9 million barrel draw. Bullish traders are hoping U.S. producers slow down production and make further progress on inventory cuts. However, the actual supply/demand picture may not be clear at this time because of the impact of Hurricane Irma.

Traders will also be watching U.S. export and production numbers in the EIA report.

Geopolitical Events

Geopolitical concerns could drive prices higher over the near-term. Iraqi government forces and Iranian-trained Iraqi paramilitaries are “preparing a major attack” on Kurdish forces in the oil-rich region of Kirkuk and near Mosul in northern Iraq, the Kurdistan Regional Government said on Wednesday.

Although an Iraqi military spokesman denied any attack, traders are taking no chances at this time with speculators buying and shorts covering.

Forecast

The recent price action suggests crude oil investors are waiting for major news to take it to the next level. In the meantime, talk of increased demand is likely to continue to provide support while investors build a new support base.

The bullish news that could drive prices over the top will be the announcement of an extension of the OPEC/Non-OPEC deal to curb production. However, based on recent comments from Russia, we may not get this good news until OPEC formally meets in November. In the meantime, prices are likely to continue to churn in a range.

Weekly December West Texas Intermediate Crude Oil Technical Analysis

(Click to enlarge)

The main trend is up according to the weekly swing chart. This typically means that trend traders will be encouraged to buy the dips in the market in an effort to sustain the rally at favorable prices.

A trade through $53.11 will change the main trend to up. If this creates enough upside momentum, we could see a rally into $55.02. This is a trigger point for an extension into the high for the year at $58.44.

A move through $46.59 will turn the trend down. If the selling pressure increases on this move then sellers will cast their eyes on the low for the year at $43.08.

The current price action is being controlled by a series of retracement levels. Until the market can clear out of the area, we’re likely to continue to see a choppy two-sided trade. This type of price action should have no effect on the chart pattern as long as the bottoms remain intact.

The main range is also the range for the year, $58.44 to $43.08. Its retracement zone is $50.76 to $52.57. The market is currently testing this zone. Holding above the 50% level at $50.76 will give the market an upside bias. Overtaking the 61.8% level will indicate the buying is getting stronger.

The intermediate range is $43.08 to $53.11. Its retracement zone at $48.10 to $46.91 is a support zone.

The short-term range is $46.59 to $53.11. Its retracement zone at $49.85 to $49.08 is another support zone. This zone provided support last week and this week’s low at $49.48 fell inside this zone.

Summary

The main trend is up according to the weekly chart so investors are likely to continue to come in on the breaks into support zones. The longer the market stays inside the support zones, the larger the support base. Solid support bases tend to lead to strong rallies.

The bullish set-up is there, but the market isn’t likely to rally unless new buyers come into the market. They’re likely to show up when fresh bullish news is announced.




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