U.S. West Texas Intermediate crude oil futures are trading slightly lower early Friday after posting three straight days of gains. Even with the small setback, the market is set to finish the week nearly 2 percent higher.
Just about all of the news has been bullish this week. Helping to support prices was a bullish U.S. Energy Information Administration’s weekly inventories report, Saudi Arabia’s halt on transporting crude through a key shipping lane, and the easing of trade tensions between the United States and European Union.
U.S. Energy Information Administration Weekly Inventories Report
Official U.S. data showed U.S. crude oil inventories last week declined more than expected to their lowest level since 2015 as exports climbed and stocks at the Cushing futures hub dropped.
Crude inventories fell 6.1 million barrels in the week-ending July 20, versus analyst expectations for a decrease of 2.3 million barrels, the U.S. Energy Information Administration said on Wednesday.
At 404.9 million barrels, inventories, not including the nation’s emergency petroleum reserve, were at their lowest level since February 2015.
Saudi Arabia Temporarily Halts Shipments
According to reports, Saudi Arabia, the world’s biggest oil exporter, said on Thursday that it was “temporarily halting” all oil shipments through the strategic Red Sea lane of Bab al-Mandeb after an attack on two big oil tankers by Yemen’s Iran-aligned Houthi movement.
Saudi Energy Minister Khalid al-Falih said in a statement that the Houthis had attacked two Saudi Very Large Crude Carriers in the Red Sea on Wednesday morning, one of which sustained minimal damage.
“Saudi Arabia is temporarily halting all oil shipments through Bab al-Mandeb Strait immediately until the situation become clearer and the maritime transit Bab al-Mandeb is safe,” the minister said.
Easing of Trade Tensions
On Wednesday, U.S. President Donald Trump and Jean-Claude Juncker, president of the European Commission, the EU’s executive body, struck a surprise deal that ended the risk of an immediate trade war between the two powers.
Weekly Technical Analysis
(Click to enlarge)
The main trend is up according to the weekly swing chart. A trade through $72.98 will signal a resumption of the uptrend. A move through $62.99 will change the main trend to down.
The market is trading inside a major retracement zone at $64.93 to $70.70. This zone is controlling the longer-term direction. In other words, look for the upside bias to strengthen on a sustained move over $70.70 and look for a downside bias to develop on a sustained move under $64.93.
The intermediate range is $62.99 to $72.98. Its 50% to 61.8% retracement zone is providing support at $67.99 to $66.81.
The short-term range is $72.98 to $66.29. Its retracement zone at $69.64 to $70.42 is acting like resistance.
Combining the retracement zones creates a major resistance area at $70.42 to $70.70. A failure at this area will form a secondary lower top and this will indicate the selling is greater than the buying at current price levels.
Overcoming $70.70 will make $66.29 a new main bottom and this will indicate the buying is getting stronger.
Based on this week’s price action, the battle between the buyers and sellers could take place between the two 50% levels at $69.64 to $67.99. The longer the market stays inside a tight trading range, the greater the volatility once it breaks out of the zone.
SEPTEMBER NATURAL GAS FUTURES CONTRACT
September Natural gas futures are in a position to finish the week. This week’s strength is being fed by a weaker-than-expected injection into storage the previous week.
With the storage report out of the way, investors are likely waiting for more information on the weather and production before making their next move.
On Thursday, the U.S. Energy Information Administration reported that U.S. natural gas in storage increased by 24 Billion Cubic Feet (Bcf) to 2.273 Tcf. The build was much less than analyst estimates calling for a build of about 39 Bcf.
The injection was higher than the 19 Bcf build reported during the corresponding week in 2017 but well below the five-year average addition of 46 Bcf, according to EIA data.
As a result, stocks were 705 Bcf, or 24%, less than the year-ago level of 2.978 Tcf and 557 Bcf, or 20%, less than the five-year average of 2.784 Tcf.
Additionally, the injection was smaller than the 46 Bcf build report the week-ending July 13.
This week’s price action indicates that a few of the weaker short-sellers have been taken out of the market. For week’s investors had shrugged off weak storage numbers, but this week’s reaction was different.
I don’t expect the current rally to last very long. In my opinion, it’s just a matter of whether the major players allow prices to rally into the nearest resistance zone at $2.845 to $2.8885 before new shorts are placed. Given the current conditions, I don’t think the major short-sellers will be too interested in selling weakness.
Milder weather is on the horizon so I expect to see futures retest the recent lows within the first two weeks of August.
Weekly Technical Analysis
(Click to enlarge)
The main trend is down according to the swing chart. However, momentum shifted to the upside the week-ending July 20 when the market formed a closing price reversal bottom. This chart pattern was confirmed this week, setting up a potential 2 to 3 week counter-trend rally.
The short-term range is $3.018 to $2.671. If the upside momentum continues then look for the rally to extend into $2.845 to $2.885. Since the main trend is down, I expect hedgers to come in on a test of this zone. This should eventually lead to breakdown under $2.671.
The return of milder temperatures and rising production should produce the bearish conditions needed to drive prices lower ahead of the start of winter later in the year. However, if you’re looking for a good sell-zone, wait for a move into at least $2.845 over the near-term rather than chasing this market lower. Shorting weakness carries too much risk at this time of year.