U.S. West Texas Intermediate crude oil futures are in a position to close flat-to-slightly higher this week. The market was set to close lower for the week before a huge short-covering rally on Thursday reversed the market to positive for the week.
Thursday’s nearly 2 percent rise was fueled by aggressive hedge buying tied to an industry report suggesting domestic crude stockpiles would soon decline again after a surprise rise in the latest week.
Traders said prices rallied early in the session when industry information provider Genscape reported that crude inventories at the Cushing, Oklahoma delivery hub for U.S. crude, dropped 1.1 million barrels since Friday, July 27.
Helping to push prices lower earlier this week have been a combination of factors. On Wednesday, prices plunged when the U.S. Energy Information Administration reported that in the week-ending July 27, total U.S. inventories rose 3.8 million barrels, while supplies at Cushing fell 1.3 million barrels.
Throughout the week, gains were limited and prices pushed lower on concerns about oversupply. Recently, Saudi Arabia, Russia, Kuwait and the United Arab Emirates have increased production to help compensate for an anticipated shortfall in Iranian crude supplies once U.S. sanctions take effect and to stabilize prices to prevent a global economic slowdown, which would lower demand.
Weekly Technical Analysis
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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. Late in the week, the market found support at $66.84, trigger a strong short-covering rally on Friday.
The short-term range is $72.98 to $66.29. Its retracement zone at $69.64 to $70.42 is acting like resistance. Early this week, sellers came in to stop a rally at $70.43. This fueled a break to $66.84.
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. This resistance cluster was tested this week when the market traded at $70.43, leading to a break into $66.84.
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, a battle between the sellers and buyers could take place between the two 61.8% levels at $70.42 to $70.70, and the 61.8% level at $66.81 and the main bottom at $66.29. 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
Natural gas futures are in a position to finish higher this week following the release of a bullish weekly government storage report. Natural gas futures prices jumped Thursday after a government report showed a smaller-than-expected storage build.
The U.S. Energy Information Administration announced a storage build of 35 Bcf in the week-ended July 27, raising U.S. inventories to 2.308 Tcf. Total stocks are 688 Bcf now below inventories one year ago and 565 Bcf under the five-year historical average.
Intermediate-Term Weather Forecast
The most recent six-to 10-day temperature forecast from the National Weather Service calls for warmer-than-average temperatures for much of the United States, but temperatures have backed off in the Pacific Northwest and Southwest compared with the intense heat the regions faced in late July.
Weekly Technical Analysis
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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. On Friday, the market tested its retracement zone at $2.845 to $2.885. Trader reaction to this zone will determine the direction of the market next week.
A sustained move under $2.845 will signal the presence of sellers. If this move generates enough downside momentum, we could see a move to $2.760 to $2.739.
A sustained move over $2.885 will indicate the buying is getting stronger.
We currently have a tricky and highly speculative situation on our hands. Inventories the last four weeks have come in below expectations and heat has lingered, but the nearby futures contract hasn’t rallied much. This is because the major hedgers aren’t too worried about the storage deficit at this time of the year because they believe that cooler weather is coming and with that lower demand. At the same time, they believe that record production will then shrink the storage deficit ahead of the winter season that begins on November 1.
If next week’s weather forecast indicates the return of milder temperatures then $2.845 to $2.885 will be resistance. If heat is put into the forecast into the end of the month then look for the market to breakout over $2.885.