Crude Collapses To Trade In Lower Range

The energy complex was most interesting this week. Crude oil prices collapsed, led by heavy fund liquidation after another surge in U.S. inventory and production. Natural gas rallied as winter returned after being declared dead about two weeks ago.

Weekly June West Texas Intermediate Crude Oil Analysis

(Click to enlarge)

After consolidating for eight weeks, crude oil prices collapsed, putting the market nearly 7 percent lower for the week. For weeks, we had been reading about the record long positions held by hedge and commodity funds. We also saw that these market players were willing to buy breaks into support, but unwilling to buy strength. This ultimately led to the market collapse because by refusing to come in with enough buying strength to overtake the resistance, they may have inadvertently allowed the short-sellers to gain the upper hand.

Essentially, the hedge and commodity funds, following The Herd Theory, spent all their capital building a potentially bullish position, but then ran out of cash when it was needed to fuel the breakout to the upside.

It was if they thought the OPEC output cuts would be enough to trigger the breakout to the upside and fuel a rally to perhaps $60.00 or $70.00 a barrel. They seemed to have forgotten about the increasing U.S. production. For nine consecutive weeks, U.S. output rose before finally hitting the tipping point this week. They also had nearly a year's worth of increasing oil rigs to monitor.

However, you can't blame the hedge funds for being bullish after all from all indications the OPEC plan was working and it was performing better than previous plans. There just wasn't that one push from Iraq and Russia that would've signaled that all the participants were all in.

Now bullish traders face uncertainty because time is running out for this initial deal and it doesn't look like there will be enough time to realign the ship before the deal expires.

So once again, I suspect that prices will fall into a range, but this time at lower levels with the previous support levels becoming the price ceiling.

On the bearish side, it doesn't look like Saudi Arabia is going to subsidize the program anymore and I don't think Iraq and Russia are going to honor their pledges.

On the bullish side, now that prices have fallen to at or below $50.00, I don't think that U.S. output will continue to increase at the previous pace.

So I have no choice but to conclude that prices are going to consolidate once again until a strong bullish or bearish force acts upon supply or demand.

The announcement of an extension of the program and reduced production by the U.S. would help stabilize prices. In my opinion, this is all the bullish traders can count on at this time.

Bearish traders are hoping the whole deal blows up because there are still a lot of long positions to be liquidated.

Technical Analysis

The June WTI crude oil contract is currently trading inside the $46.25 to $57.95 range. Its retracement zone is $52.10 to $50.72. Inside this range is a major 50% level at $51.44.

If the buying pressure dries up then $50.72 to $52.10 is likely to become the new resistance. The market is likely to stick pretty close to this area over the near-term.

If the news turns bearish enough to lead to increased selling pressure then crude oil prices are likely to retreat further with the next major target coming in at $47.07.

I don't think we'll rally unless the buying is strong enough to overcome $52.10. If the buying weakens and the selling increases then I believe you'll have a chance to buy crude well under $50.00 later in the year.