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 weren’t certain how to play the market. For many, there was no blue print. In fact, the initial response to the first news of Hurricane Harvey was to drive prices higher. This was because traders thought it would turn into a panic buying situation. This was the way traders reacted to Hurricane Katrina over 10-years ago when it pounded refineries in Louisiana.
It actually took a few days for investors to realize it had become a “buy gasoline, sell crude oil” situation. Now that the recovery is slowing taking place, investors quickly turned this into a “sell gasoline, buy crude oil” situation.
EIA Inventories Report
Based on the current price at $48.94, which is only $0.03 above the high reached before the refinery shutdowns, I think it’s safe to assume that the hurricane effect has been discounted and that traders are gradually reacting to the traditional supply demand fundamentals.
This week, the U.S. Energy Information Administration (EIA) said on Thursday that refinery utilization rates slumped 16.9 percentage points to 79.7 percent last week, the lowest rate since 2010.
Additionally, the EIA report said commercial U.S. inventories rose 4.6 million barrels the week-ending September 1 to 462.25 million barrels. However, U.S. oil production was also affected by the storm, with weekly output down from 9.5 million bpd to 8.8 million bpd.
Currently, U.S. crude oil prices should be supported as U.S. refineries increase their oil demand as they recover from recent flooding. Outside of the U.S., the return of Libya’s largest oil field to production is less supportive of prices.
Oil production at Libya’s Sharara field, the country’s largest, resumed this week after a valve was reopened on a pipeline shut by an armed group for more than two weeks, Libyan oil industry sources said.
Traders should also know that it is probably going to take weeks for the U.S. petroleum industry to return to full capacity.
In breaking news, Brent crude oil is encouraging some buying from news that Saudi Arabia will cut crude oil allocations to its customers worldwide in October by 350,000 barrels per day. I expect this news to have very little impact on prices over the near-term.
Traders should be paying close attention to Hurricane Irma, which is expected to make contact with Florida, this week-end. There are no refineries at risk, but nonetheless, a storm this powerful could have a lasting effect on refinery and industry demand. At immediate risk is gasoline demand because Florida is a driving state and the storm is expected to move straight up the entire state, inflicting damage on both coasts. The hurricane may even extend into Georgia and the Carolinas.
Essentially, the impact of the hurricane on U.S. oil production should not be overestimated, nor should its impact on demand for crude oil or gasoline be underestimated.
Weekly October West Texas Intermediate Crude Oil Technical Analysis
(Click to enlarge)
The main trend is down according to the daily swing chart. However, momentum is trending higher. If the upside momentum continues then the market may challenge the last main top at $50.51. A trade though this level will change the main trend to up with potential targets at $52.50 and $54.87.
A trade through $45.58 will signal a resumption of the downtrend with $42.52 the next likely downside target.
The short-term range is $42.52 to $50.51. Its retracement zone is $46.52 to $45.57. Based on the recent price action, this zone should be considered support.
The main range is $58.34 to $42.52. Its retracement zone is $50.43 to $52.30. This zone is the primary upside target. Even if the trend changes to up on a move through $50.51, we may still see counter-trend sellers come in on a test of the retracement zone.
If the buying is ever strong enough to overcome the top of the retracement zone at $52.30 then we could see an acceleration to the upside.