Crude oil traders have responded in almost textbook fashion to the news that the refineries in the Texas Gulf Coast area are being brought back into service after last week’s devastating hurricane and massive flooding.
As Hurricane Harvey approached the key Houston, Texas refinery hub, the October West Texas crude oil futures contract retreated from $48.91, it gradually worked its way to $45.58, before aggressive counter-trend buyers and bargain-hunters took advantage of the relatively cheaper prices as the market tested a major technical support target.
After reaching its low at $45.58, the October futures contract formed a powerful closing price reversal bottom. The reaction of the market strongly indicated that the rally was fueled by a combination of short-covering and aggressive buying.
The subsequent follow-through rally has taken WTI crude oil beyond the starting point of the break, reaching a high this week at $49.42. Since that price was reached on Wednesday, prices have consolidated, suggesting upside momentum may be slowing due to profit-taking.
What I find interesting about the chart pattern is the speed at which the market recovered its losses. However, if you think about it, the market wasn’t really being driven lower during the storm by new short-selling, but rather aggressive liquidation. The rally was essentially a “do over” for bullish traders.
If you recall, as the storm approached the refineries, traders…