U.S. West Texas Intermediate crude oil futures are trading higher early Friday, putting the market in a position to close higher for the week. While this chart pattern isn’t enough to change the main trend to up, it is a sign that the buying is greater than the selling at current price levels.
Crude oil prices have been supported this week by supply issues in Venezuela, where state-owned oil firm PDVSA is struggling to clear a backlog of around 24 million barrels of crude waiting to be shipped to customers.
The situation got so bad earlier in the week that the government threatened force majeure that would have effectively cancelled all future delivery contracts. This would have reduced supply in the open market and driven prices higher.
Despite the developing strength in the market, which is likely the result of aggressive short-covering, there are still the major issues of increasing U.S. production and the possibility of increased output from OPEC and other major non-OPEC producers.
OPEC and Russia are due to meet at the organization’s headquarters in Vienna on June 22 to discuss production policy.
Fundamental Analysis
Crude oil was also underpinned late Tuesday by the American Petroleum Institute’s weekly inventories report that showed a larger-than-expected drawdown.
However, prices dropped sharply from intraday highs on Wednesday after the U.S. Energy Information Administration reported another rise in U.S. production. The EIA said crude oil output hit another record last week at 10.8 million barrels per day (bpd).
U.S. crude inventories also rose, gaining 2.1 million barrels in the week to June 1, to 436.6 million barrels, according to EIA data.
OPEC is set to meet at its headquarters in Vienna, together with top producer but non-OPEC member Russia, on June 22 to discuss production policy.
Technical Analysis
The main trend is up according to the Monthly August West Texas Intermediate crude oil chart. However, momentum shifted to the downside in May when the market formed a closing price reversal top on the monthly chart. The subsequent follow-through to the downside in June confirmed the potentially bearish chart pattern. This signaled the start of a potential 2 to 3 month correction equal to 50% to 61.8% of the last rally.
The main range is the contract range of $89.45 to $39.88. Its retracement zone is $64.67 to $70.51. This zone is controlling the longer-term direction of the crude oil market. The market is currently trading inside this range which indicates that traders have decided yet if they want to take this market higher or lower over the near-term.
This week, for instance, the market straddled then found support on the 50% level at $64.67. Trading on a 50% level or balance price is probably the best way to demonstrate a market that appears to be balanced between buyers and sellers.
A sustained move over $64.67 this month could create the momentum needed to trigger a retest of the Fibonacci level at $70.51.
However, a sustained move under $64.67 this month will signal the presence of sellers. If the sellers hit the market with conviction then we could see an acceleration to the downside with the next major target coming in at $58.89.
Forecast
WTI crude oil is sitting at a key level on the charts. Trader reaction to this area will either fuel the start of a meaningful short-covering rally, or another steep plunge in prices.
The chart pattern indicates that investors are waiting for OPEC to make the next call. If OPEC decides to make up for the entire Venezuelan shortfall plus any shortages it expects from sanctions against Iran then oil prices are likely to retreat further.
If OPEC decides not to make up most of the shortfall in Venezuela, or if the troubled nation decides to declare force majeure then we could see a spike to the upside in prices.
We’ll continue to look for a two-sided trade until OPEC and Russia make their decision on what to do about supply issues involving Venezuela and Iraq. Typically, the period before a key meeting or announcement is filled with disinformation, leading to a choppy trade. We could be going through this at this time.
Watch the price action and read the order flow in June and July at $64.67. Trader reaction to this level will tell us if the buyers have returned or if sellers are taking control.
