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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Crude Crumbles On Demand Concerns As NatGas Buyers Fear Supply Squeeze

Natural Gas

U.S. October West Texas Intermediate crude oil posted its steepest monthly loss in more than a year on demand concerns after hurricane damage and floods knocked out a quarter of U.S. refining capacity.

U.S. gasoline futures continued to soar, with prices hitting a two-year high above $2 a gallon, boosted by fears of a fuel shortage just days ahead of the Labor Day weekend that typically brings a surge in driving while marking the end of the U.S. driving season.

In other news, the U.S. Energy Department said it would release 500,000 barrels of crude oil from the Strategic Petroleum Reserve.

The Colonial Pipeline Co, which operates the biggest U.S. fuel transport system, said it would shut its main lines to the Northeast amid outages at pumping points and lack of supply from refiners.

The price action at the end of the week suggests the current steep recovery was a response to a bigger-than-expected sell-off. This likely made the market more attractive to bargain-hunters.

Goldman Sachs is saying they expected U.S. infrastructure outages to last several months but said it was difficult to estimate the exact damage.

Some analysts are saying the negative impact on crude oil demand and oil product supply might be less severe than feared. This is because refineries outside the affected area may delay maintenance to benefit from high processing margins.

Traders have been respecting support and resistance, but the sideways trading range suggests they are still uncertain about how to play this market until they find out the duration of the refinery shut downs.

October West Texas Intermediate Crude Oil Technical Analysis

(Click to enlarge)

The main trend is down according to the weekly swing chart. A trade through $50.51 will turn the main trend to up. A move through $42.52 will signal a resumption of the downtrend.

The short-term range is $42.52 to $50.51. Its retracement zone at $46.52 to $45.57 stopped the selling this week at $45.58.

The price action suggests we could see an upside bias develop on a sustained move over $46.52 and for the downside bias to resume on a trade through $45.57.

If the counter-trend rally that started from $45.58 continues then look for a drive into a long-term downtrending angle at $49.59. Since the trend is down, we could see a technical bounce on the first test of this angle.

Overtaking $49.59 will indicate the buying is getting stronger with the next targets $50.43 and $50.51.

Taking out $50.51 will change the main trend to up. This could trigger a surge to the upside with the next target the main Fibonacci level at $52.29, followed by the main top at $52.50.

The current set-up on the weekly chart suggests that we could see a steep sell-off if $45.57 fails as support. This move could drive the market into the major bottom at $42.52.

Forecast

The short-term picture indicates an upside bias could develop on a sustained move over $46.52. The longer-term picture could turn bullish on a sustained move over $50.51.

On the downside, the market is most vulnerable for a breakdown under $45.57 with $42.52 the next target.

Natural gas futures posted a potentially bullish outside move this week, driven by technical factors and production concerns over the damage caused by Hurricane Harvey and the flooding along the Gulf Coast of Texas.

Unlike the crude oil market where investors are concerned about demand, the natural gas market is being driven by supply issues.

Production, however, is likely to fall sharply in the coming weeks, as about one-fifth of offshore production has been shut down due to Tropical Storm Harvey.

Texas’s Eagle Ford shale region, which has been substantial growth in recent years thanks to the shale boom, has also seen production shut down due to the storm, and it may be some time before activity resumes.

In other news, according to the U.S. Energy Information Administration, domestic supplies of natural gas rose by 30 billion cubic feet for the week-ended August 25. Traders were looking for a build of about 29 billion cubic feet.

The EIA report also showed total stocks now stand at 3.155 trillion cubic feet, down 239 billion cubic feet from a year ago, but 8 billion cubic feet above the five-year average.

October Natural Gas Technical Analysis

(Click to enlarge)

The main trend is down on the weekly chart, but the market has been forming a support base for four weeks. This suggests that momentum is getting ready to shift to the upside.

The main range is $3.520 to $2.799. If the upside momentum continues, we could see a short-term surge into $3.160 to $3.245.

(Click to enlarge)

The main trend is also down on the monthly chart. However, in August, the October futures contract posted a potentially bullish closing price reversal bottom.

The main range is $2.434 to $3.619. Its retracement zone is $3.027 to $2.887. Sellers tried to drive the market through this zone but the market stopped going down at $2.799.

The current price action suggests that an upside bias could develop on a sustained move over $3.027 and that the selling will resume on a sustained move under $2.887.

If buyers gain control then look for the rally to extend into at least $3.160 to $3.245. Buyers will have to come in strong over $3.245 to trigger a possible acceleration into $3.520.

The inability to rally natural gas beyond the retracement zone target at $3.160 to $3.245, or hold above $3.027 will mean the supply concerns have been reduced and that production is likely to return to normal over the short-run.




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