Demand Pitfalls, High Supply Threaten Long-Term Trend

Despite rebounding on Thursday and early Friday, October West Texas Intermediate crude oil futures are heading for a third consecutive weekly decline and its sixth weekly lower close out of seven amid increasing concerns about slowing global economic growth that could hit demand for petroleum products.

Additional bearish factors include data released earlier this week showing a large build in U.S. inventories. The crisis in Turkey also contributed to the weakness by driving up demand for the U.S. Dollar. This lead to a broad sell-off in dollar-denominated commodities including crude oil.

Traders are also concerned about the impact of the U.S. tariffs on China. Asian demand is showing signs of slowing down as trade disputes and a stronger dollar drag the economies of some of the world’s largest oil buyers.

The news that the U.S. and China will renew trade talks in late August may provide enough optimism to fuel a short-covering rally back into resistance, but without a permanent solution to the trade dispute, this rally is likely to be met with fresh selling pressure.

At this time, the fundamentals are bearish so it’s probably going to take a supply disruption to drive prices sharply higher.

U.S. Inventories Report

The bulk of the loss this week came on Wednesday after the release of a bearish government report. The U.S. Energy Information Administration said yesterday that crude oil inventory levels rose by 6.8 million barrels, to 414.19 million barrels. Traders were looking for a 2.6 million barrel draw down.

The EIA also said that U.S. crude production rose by 100,000 barrels per day (bpd) in the week-ending August 10, to 10.9 million bpd.

Technical Analysis

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The main trend is up according to the weekly swing chart. However, momentum is trending lower. A trade though $62.60 will change the main trend to down. A move through $71.63 will signal a resumption of the uptrend.

The short-term range is $71.63 to $62.60. Its 50% level or pivot is $67.12. This level is controlling the momentum. Overtaking will shift investor sentiment and momentum back up.

The main range is $54.74 to $71.63. Its retracement zone at $63.19 to $61.19 is the primary downside target. This zone stopped a sell-off at $62.60 during the week-ending June 22. Look for buyers to show up on a test of this zone.

Forecast

Although there are still lingering concerns over supply due to the sanctions against Iran, the possibility of lower demand due to a global economic slowdown caused by trade disputes, rising interest rates and collapsing emerging markets is the story at this time.

The bets seem to be shifting toward the downside and this trend is likely to continue over the short-run unless there is an unexpected supply disruption.