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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Crude Oil Setting Up For Top And Two-Week Correction

July crude oil futures crossed to the strong side of $50.00 per barrel on May 26, but traders apparently didn’t like the view since the market settled twenty-five cents lower. Early in the session, one headline read, “Crude Oil Tops $50 as Supply Worries Subside”. Later in the day after prices weakened, the headline read, “US Oil Settles Under $50 as Supply Worries Resurface”. So I have to conclude that $50 is the magic number that separates the bulls from the bears.

Longer-term traders cite the global supply glut as one reason why prices are unsustainable over $50.”At 537.1 million barrels, U.S. crude oil inventories are at historically high levels for this time of year,” the Energy Information Administration (EIA) said in its weekly status report.

This week’s U.S. Energy Information Administration’s weekly inventories report was somewhat bullish as U.S. crude supplies fell 4.2 million barrels, more than the 1.7 million barrel estimate. Gasoline supplies, rose however.

The EIA report also showed that domestic oil production in the lower 48 states fell by 20,000 barrels a day to 8.265 million barrels a day.

Fifty dollars a barrel has long been thought of as the price that would entice producers to restart closed rigs. We may have seen evidence that we are close to this happening. On May 20, Baker Hughes released its weekly U.S. crude oil rig count. It was unchanged at 318 rigs for the week ended May 20. This is the lowest level since the 1940s. Last year at this time it was at 659 rigs.

The rig count could be the swing number in the crude oil market and it should be watched carefully. If it starts to trend higher then I expect prices to decline into a trading range. I also expect to see increased volatility because this indicator will raise uncertainty and bullish traders don’t like uncertainty.

I didn’t touch on renewed production in Canada after the wildfires and the unrest in Nigeria and Libya because I think these are short-term events and not that relevant to the long-term picture. I also believe that speculative money is being drawn into the long side of market because of these events. They may be supportive over the short-run, but the stories will go away eventually.

(Click to enlarge)

Technically, the main trend is up according to the weekly swing chart. The market is not in a position to change the main trend to down, but it…




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