Does Oil Have Room To Rally?

U.S. West Texas Intermediate crude oil futures are trading slightly better on Friday after posting a steep sell-off the previous session. The strength is probably just a knee-jerk reaction to increased demand for risky assets after stocks plummeted on Thursday. Despite the marginal strength, the market is still trading lower for the week and in a position to form a technically bearish closing price reversal top that could signal the start of a 2 to 3-week correction.

Second Wave of COVID-19 Cases Raises Demand Concerns

Crude oil futures are being pressured this week due to worries about weak global energy demand.

Traders blamed the weakness on concerns over a surge in U.S. coronavirus cases this week that raised the prospect of a second wave of the COVID-19 outbreak hitting demand in the world’s top consumer of crude and fuel.

Reuters said the reality that the coronavirus pandemic may be far from over has brought the rally that raised oil off April lows to a shuddering halt, with infections in the United States alone passing 2 million.

US Supply Issues Move to Forefront

U.S. crude inventories rose unexpectedly by 5.7 million barrels in the week to June 5 to 538.1 million barrels – a record – as imports were boosted by the arrival of supplies bought by refiners when Saudi Arabia flooded the market with cheap oil in March and April, Energy Information Administration (EIA) data showed.

The EIA report also showed gasoline stockpiles grew more than expected to 258.7 million barrels. Distillate stockpiles, which include diesel and heating oil, rose by 1.6 million barrels, although the increase was smaller than in previous weeks.

Federal Reserve Paints Bearish Picture

Concerns over future demand rose to the forefront late Wednesday after the U.S. Federal Reserve said U.S. unemployment was set to reach 9.3% at the end of 2020 and said it would take years to fall back, while interest rates were expected to stay near zero at least through next year.

Weekly Technical Analysis

Weekly August WTI Crude Oil

Trend Analysis

The main trend is down according to the weekly swing chart, however, momentum is trending higher. A trade through $54.71 will change the main trend to up. A move through $20.28 will signal a resumption of the downtrend.

The main range is $62.21 to $20.28. Its retracement zone at $41.25 to $46.19 is the primary upside target and resistance zone. This zone is controlling the longer-term direction of the market.

The intermediate-range is $54.71 to $20.28. Its retracement zone at $37.50 to $41.56 is also a resistance zone. This area appears to have stopped the rally this week at $40.69.

The new short-term range is $20.28 to $40.69. Its retracement zone at $30.49 to $28.08 is the primary downside target.

Weekly Technical Forecast

Based on this week’s price action, the direction of the August WTI crude oil market the week-ending June 19 is likely to be determined by trader reaction to the intermediate 50% level at $37.50.

Bearish Scenario

A sustained move under $37.50 will indicate the presence of sellers. If this creates enough downside pressure then look for a break into the uptrending Gann angle at $36.28.

The angle at $36.28 is a potential trigger point for an acceleration to the downside with the next target the short-term retracement zone at $30.49 to $28.08.

Bullish Scenario

A sustained move over $37.50 will signal the presence of buyers. This could create the upside momentum needed to challenge a series of potential resistance levels at $39.21, $40.69 and $41.25.

Taking out $41.25 will indicate the buying is getting stronger with $46.19 a major upside target.

Weekly Technical Outlook

After posting a seven-week rally, the August WTI crude oil futures contract is posting a potentially bearish closing price reversal top the week-ending June 12. In plain language, a prolonged move up in terms of price and time, followed by a higher-high and a lower-close.

If confirmed next week, this could lead to the start of a 2 to 3-week correction with $30.49 the minimum downside target. This chart pattern may be necessary to alleviate some of the upside pressure and to create a better buying opportunity for longer-term traders.

Weekly Fundamental Outlook

This week’s price action suggests that the OPEC+ deal to extend the production cuts for two months is being treated as a “Buy the Rumor, Sell the Fact” event. Furthermore, as the events unfolded this week regarding the Fed’s gloomy outlook, the EIA’s bearish numbers, a resurgence in COVID-19 cases and a plunge in the stock market, the deal now looks like dust in the wind.

Looking forward, the rise in coronavirus cases and a possible second wave of infections is going to be the main price driver over the near-term.

The industry has a major supply-demand imbalance problem and as coronavirus cases rise, demand destruction worries will likely be the biggest influence on prices.

In Houston, Lina Hidalgo, a senior official for the county that includes the city at the heart of the U.S. oil industry, said “we may be approaching the precipice of a disaster”.