June West Texas Intermediate Crude Oil futures is under pressure this week, but in a position to close higher for the week if enough buying comes in to drive the market over $49.62 on the close on Friday. I mention this because this will mean the surprise draw reported by the U.S. Energy Information Administration this week is exerting a positive influence on crude oil prices.
If crude oil prices fail to close higher, then this will indicate that investors believe rising gasoline stocks will have an extended bearish influence on crude oil prices.
On Wednesday, April 26, traders initially drove prices higher from their intraday lows after U.S. data showed refiners used up more crude oil than ever from storage tanks, drawing down stockpiles. However, prices weakened into the close as falling gasoline prices weighed on the crude oil market.
Based on the government report, we can conclude that refineries returned from maintenance season, increased runs to an all-time modern record for crude processing, and turned the crude oil surplus into petroleum products.
The U.S. Energy Information Administration supported this conclusion when it reported that U.S. crude inventories fell 3.6 million barrels last week. The draw was significantly more than analysts and traders were expecting and completely opposite from the nearly 900,000-barrel build reported late Tuesday by the American Petroleum Institute.
The EIA report also showed that refiners processed nearly 17.3 million barrels of oil a day last week – the highest ever recorded in EIA data. Refinery utilization of 94.1% was the highest level for this time of year since April 2001.
Crude oil prices initially rose on the surprise drawdown, but gains were capped when traders realized that the gasoline output was far greater than the demand. According to the EIA, gasoline stockpiles grew by 3.4 million barrels the week-ending April 21. Diesel stockpiles also increased unexpectedly, rising by 2.7 million barrels.
Weekly June West Texas Intermediate Crude Oil
(Click to enlarge)
The main trend is up according to the weekly swing chart. A trade through $47.58 will turn the main trend to down. This would likely lead to a challenge of the next main bottom at $46.25.
Despite the bearish fundamentals, it looks as if buyers came in to defend the trend this week at $48.20.
On the downside, the major retracement zone and primary downside target is $47.07 to $44.50. This zone provided support the week-ending November 18 when the market formed the bottom at $46.25.
The current chart pattern suggests investors are going to have a hard time generating upside momentum. This is because of a series of retracement levels that have the potential to become key resistance levels.
The first upside target is $50.09. Overtaking this level will indicate the buying is greater than the selling at current price levels. This could trigger a move into a pair of 50% levels at $50.86 and $51.17.
The rally will begin to expand over $51.17 with the next target $51.87.
The main range is $57.95 to $47.58. If the rally is strong enough then its retracement zone at $52.77 to $53.99 will become the primary upside target.
The weekly chart indicates the way of least resistance is down because the support levels are spread wide. Any rally is likely to be labored because the retracement levels are pretty tight.
Unless the market is hit with extremely bearish news, I don’t think traders will want to short the market on weakness. However, given the current bearish outlook, I think traders will be more interested in shorting rallies into retracement levels.
If the daily chart upside momentum continues then look for buyers to try to overcome $50.09. This move will likely trigger a short-covering rally into $50.86 to $51.17. Look for aggressive counter-trend sellers to come in on a test of this zone.
If traders are forced to sell weakness then they are going to go after the bottom at $47.58. Short-sellers are going to have to be careful selling into the major 50% level at $47.07 and the main bottom at $46.25. This is because value seekers may come in to buy on a test of the major retracement zone at $47.07 to $44.50.
Weekly June RBOB Gasoline
(Click to enlarge)
The main trend is down according to the weekly swing chart. The trend turned down this week when the sellers took out the last main bottom at $1.5908. The new main top is $1.7696.
The main range is $1.2569 to $1.9012. Its retracement zone is $1.5791 to $1.5030. The market is currently testing this zone. Trader reaction to this zone will likely determine the longer-term direction of the market.
Based on Thursday’s close at $1.5615, the direction of the June RBOB Gasoline futures contract today is likely to be determined by trader reaction to the 50% level at $1.5791.
A sustained move under $1.5791 will indicate the selling is getting stronger. This could drive the market into a pair of bottoms at $1.5233 and $1.5220. This is followed by the major Fibonacci level at $1.5030. Anyone of these levels is capable of stopping the selling pressure, but if 1.5030 is taken out with above average selling volume behind it then look out to the downside. We could see an eventual break into the main bottom at $1.4335.
If buyers come in to overtake the 50% level at $1.5791 then we should see a short-covering rally. Unless there is a sudden shift in the fundamentals, this is likely to be a new shorting opportunity.
The change in trend to down on the weekly June RBOB Gasoline chart is a significant development because if sellers can sustain the move then this is likely to drag down the June WTI Crude Oil market. This could change its trend to down for the first time since mid-November, or shortly before the OPEC-led program to cut output was announced. This is significant because it may mean that the crude oil trend will be down on the important weekly chart when OPEC meets on May 25.
Although the crude oil surplus has been narrowing in April, the gasoline supply has been increasing. This should keep a lid on crude oil prices. However, if crude inventories start to climb again, then combined with rising gasoline stocks, we could see another plunge in prices.
Additionally, a jump in oil imports and indications that the global supply glut is not decreasing as rapidly as desired, likely means crude oil could have trouble sustaining a rally over $50.
The OPEC-led output cuts were supposed to accelerate the decrease in the global supply glut, but the data suggests it isn’t working. Even if OPEC decides to extend the program, it’s still going to be a long time before we see an accelerated drawdown in U.S. inventories.
The chart pattern suggests that crude oil buyers may be defending the March bottom at $47.58, however, it’s still within target. I can’t build a case for higher prices unless the WTI contract can overcome $50.86 over the near-term.