U.S. West Texas Intermediate crude oil futures posted a strong gain this week, underpinned by a number of factors. The buying was strong enough to drive the market into its highest level since March 7 at $54.14, before sellers came in to stop the rally and buyers backed away from buying strength.
June WTI crude oil closed the week at $53.40, up $0.76 or +1.44%.
Crude oil started the week with a strong surge on reports of another shutdown at Libya’s largest oilfield over the weekend and geopolitical concerns following last week’s U.S. missile strike on Syria.
Reuters reported that Libya’s Sharara oilfield was shut on April 9 after a group blocked a pipeline linking it to an oil terminal. This was the second time in two weeks that this field had been shut down. Earlier in the month, the oil field returned to production after a week-long stoppage.
The outage in Libya came on the heels of an already excited market. The previous Friday, the United States had fired missiles at a Syrian government air base in a show of force. The move did not cause any supply disruptions, but it did make investors nervous over a possible retaliation from Iran or Russia.
Throughout the week, tensions remained high based on the rhetoric between the United States and Russia.
U.S. – Russia relations are at a “low point” and need to be improved, Secretary of State Rex Tillerson said on April 12 in a joint news conference in Moscow with Russian Foreign Minister Sergey Lavrov.
June crude oil futures continued to find support on April 11 after the American Petroleum Institute reported that U.S. crude stocks fell unexpectedly the week-ending April 7 as imports declined and refinery runs rose.
Crude oil prices rose to a one-month high on April 12, but prices retreated into the close after eight straight sessions of gains after U.S. crude inventory data suggested that the market was still heavily supplied. Traders reacted to weekly U.S. production estimates from the Energy Information Administration that suggested domestic output is still climbing.
One of the major concerns was the stockpiles at the Cushing, Oklahoma futures hub. The weekly EIA report showed that supply at Cushing stood at 276,000 barrels in the week.
The EIA data also showed an unexpected drop in overall U.S. crude inventories, which fell in the week by 2.2 million barrels as imports declined by 717,000 barrels a day.
Throughout the week, crude oil prices were also underpinned by reports that Saudi Arabia was encouraging fellow OPEC members and some rivals to extend supply cuts beyond June.
Although Wednesday’s price action suggested the market was poised for the start of a sharp near-term correction, there was no follow-through move to the downside as the week came to an early end on Thursday due to the Easter holiday. This was because prices firmed as investors reacted positively to a report from the International Energy Agency (IEA).
According to the IEA, the oil market is “slowly but surely” reaching a balance as a result of the success of the OPEC production deal.
“We’re seeing demand growing fairly steadily in the oil market and we think that the balance is coming together slowly but surely and the numbers are there to support it,” Neil Atkinson said shortly after the IEA published its monthly oil report.
“We think that as the year progresses that rebalancing will become more and more apparent in the drawdown of actual physical stocks,” he added.
“It is now halftime for the six-month oil production cuts agreed by OPEC and eleven non-OPEC countries. So far, the game has gone fairly well for producers,” the Paris-based organization said in the report published Thursday.
“For OPEC countries, compliance has been impressive from the start while non-OPEC participants are gradually increasing their compliance rate, although in their case it is harder for analysts to verify the data,” the IEA added.
(Click to enlarge)
The main trend is up according to the weekly swing chart.
The main range is $57.95 to $47.58. Its retracement zone is $52.75 to $53.97. This zone is currently being tested. Trader reaction to this zone will determine the near-term direction of the market.
A sustained move over $54.14 will indicate the buying is getting stronger. However, expect a labored rally because of a resistance cluster at $53.97 to $55.88. If this zone is overtaken then look for an acceleration into the major top at $57.95.
A sustained move under $52.74 will signal the presence of sellers. The new short-term range is $47.58 to $54.14. Its retracement zone is $50.86 to $50.09. If there is a sell-off then this zone will be the primary downside target.
The beauty part about the three-week rally is that it leveled the playing field by bringing prices back to a key retracement zone at $52.74 to $53.97. Trader reaction to this zone will determine the near-term direction of the market.
If the IEA data is valid then we could see a surge to the upside through $52.74. If investors believe the EIA data then prices will begin to retreat below $52.74.
There is no way to tell how much of the rally is being supported by the geopolitical tensions over Syria. However, if things calm down then I suspect there will be some giveback.