September Crude Oil futures have been trading mostly lower since the U.K. voted to leave the Euro Zone, a move that could lead to a recession in Britain and Europe and a drop in demand. However, this week it looks as if the market finally reacted to the bearish supply/demand situation also.
The day before the Brexit referendum, the market closed at $50.11. Two days later it reached a low of $45.83. A subsequent short-covering rally sent the futures contract to $50.11 on June 29 and since then it has been downhill all the way with the September contract reaching a low at $44.87 this week.
The futures contract fell nearly 5 percent on July 7, reversing early intraday gains after the U.S. government reported a weekly crude oil draw that was a bearish surprise to bullish traders expecting a larger drawdown.
According to the Energy Information Administration, U.S. commercial crude stockpiles fell by 2.2 million barrels to a total of 524.4 million in the week through July 1. Traders were looking for a drawdown of 2.3 million barrels, far less than the 6.7 million-barrel draw reported by trade group the American Petroleum Institute for the same period on July 6.
Crude oil futures traders also reacted negatively to the EIA’s gasoline inventory drawdown that was just about a third of market expectations.
Helping to put a cap on crude oil recently has been the lack of demand for gasoline with many traders fearing a glut of the motor fuel, despite the busiest season for driving in the U.S. Thursday’s report confirmed, this notion when the government report showed inventories fell less than expected, slipping 122,000 barrels versus forecasts of 353,000 barrels.
Crude oil futures were helped a little by the news that weekly U.S. production fell by 194,000 barrels per day, however, many traders feel that monthly data that operates on a significant lag is more accurate. The EIA report also showed gasoline supplies rose by 46,000 barrels per day to more than 9.75 million barrels per day.
With supply declining slower than expected and demand expected to fall because of the aftermath of Brexit, crude oil prices are expected to continue to weaken over the near-term until they reach a value area. At that point, the markets may stabilize, but there is still no guarantee we’ll see $50.00 again this year given the situations in the U.K. and Europe.
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Technically, the main trend is up according to the daily swing chart. However, momentum has been to the downside since the top at $52.73 the week-ending June 10.
The short-term range is $38.67 to $52.73. Its retracement zone at $45.70 to $44.04 is the first downside target. If investors perceive this zone as value then we could see buyers show up on a test of this zone to stop the price slide. This could produce a short-term technical bounce.
The main range is $32.85 to $52.73. Its retracement zone at $42.79 to $40.44 is the primary downside target. This is the major zone that will decide whether we stabilize the rest of the year or whether we retest the contract low.
Currently, the market is falling faster than a Gann angle that is dropping at a rate of $1.00 per week (Blue Angle). If it continues to follow this angle lower then we could see a test of the major 50% level at $42.79 the week-ending August 19 or the 61.8% level at $40.44 the week-ending September 2.
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The weekly September Gasoline chart clearly shows this market is pulling crude oil futures lower. Its main trend is down according to the weekly swing chart. The trend turned down this week when sellers took out the previous swing bottom at $1.4295.
Its main range is $1.1171 to $1.6344. Its retracement zone at $1.3758 to $1.3147 is the primary downside target. The upper or 50% level of this range at $1.3758 was tested on July 7.
We could see a technical bounce on the first test of $1.3758, but the downside momentum and the current fundamental picture suggests that any rally is not likely to last and that it will only create another shorting opportunity.
If sellers are able to sustain a move through 1.3758 then the next downside target comes in at $1.3147. If this price fails as support then we could see the start of an acceleration to the downside with a possible target of $1.25 the week-ending August 19.
Crude oil prices have further downside potential over the next 6 weeks with the market primarily being driven by weak gasoline prices. Both markets are trading well below steep downtrending angles that are driving crude oil down by a rate of $1.00 per week from its June top and gasoline prices at a pace of $0.04 per week from its high the week-ending June 10.
Although both markets are in a position to test major retracement zones of their 2016 range, the markets could still trade through them and retest their contract lows later in the year if buyers don’t recognize these areas as value.
Overall, I have to conclude that crude oil and gasoline are in their potentially weakest position since January.