Fragile Oil Markets Stabilize On Two-Sided Trading

U.S. West Texas Intermediate and international-benchmark Brent crude oil posted a two-sided trade this week before closing lower. This week's trade pitted the bullish traders, who believe the OPEC-led production cuts that are helping to trim supply and stabilize prices, would be extended beyond 2018 and into 2019 against the bearish traders who are banking on rising U.S. production to thwart the coalition's strategy.

For the week, May WTI crude oil settled at $64.94, down $0.94 or -1.43% and June Brent crude oil finished at $69.34, down $0.47 or -0.67%.

This week's trade started on a bullish note with the markets surging to new highs for the year. The move was triggered by follow-through buying tied to the momentum created by the previous week's 5.0% plus gains.

At this time last week, we were questioning whether the rally would continue because the move was being fueled by speculation and aggressive short-covering. We didn't think that the rally had much backing from the hedge funds because they had been liquidating positions for much of the first half of March.

We may be right on our assessment because both the WTI and Brent contracts formed weekly technical closing price reversal tops which tend to trigger the start of 2 to 3 week corrections.

Fundamentals

Crude oil futures began the week supported by a rebound in stock markets and escalating Saudi-Iran tensions. Global stocks came off six-week lows on optimism that the United States and China are set to begin trade talks, easing fears about a trade war between the world's two largest economies. The market also found support from rising Middle East tensions between Saudi Arabia and Iran. These events drove prices to their highs.

The news wasn't enough to sustain the push toward higher prices, however, and investors took the opportunity to cash in some profits from the rally.

Prices started to accelerate to the downside on Tuesday and Wednesday as reports of increasing U.S. crude inventories from the American Petroleum Institute (API) and the U.S. Energy Information Administration (EIA) surprised traders.

The API reported on Tuesday a surprise 5.3 million barrel rise in crude stocks the week-ended March 23, to 430.6 million barrels. Traders were looking for a 1.6 million barrel build.

On Wednesday, the EIA said the nation's stockpile of crude oil jumped by 1.6 million barrels in the week through March 23. Stocks also jumped by 1.8 million barrels at the closely watch futures delivery hub for crude oil located in Cushing, Oklahoma.

In other news, U.S. energy companies this week cut oil rigs for the first time in three weeks. Drillers cut six oil rigs in the week to March 29, bringing the total count down to 798, General Electric Co.'s Baker Hughes energy services firm said in its closely followed report on Thursday.

Prices finished higher on Thursday with crude oil ending the quarter up 7.5%.

Weekly Technical Analysis

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The main trend is up according to the weekly swing chart. The uptrend was reaffirmed this week when buyers took out the previous top at $66.02.

A trade through $57.60 will change the minor trend to down. A move through $55.90 will change the main trend to down.

The short-term range is $57.60 to $66.55. Its 50% level or pivot is $62.08. This price is controlling the short-term direction of the market and the momentum. Investor sentiment will shift to the downside if this price is violated.

The main range is $47.50 to $66.55. Its retracement zone at $57.03 to $54.78 is major support.

Weekly Forecast

Fundamentally, the market appears to be fragile. While it is nice for the bullish traders that OPEC is considering extending its production cuts, they aren't even going to consider the matter until June and probably aren't going to make a final decision until its meeting in November. So I expect this story to eventually fade away.

In the meantime, I think the key issue will remain rising U.S. production. This should eventually lead to lower prices. Furthermore, I don't think that the hedge funds are interested in buying strength, but would prefer to buy a pullback into more favorable price levels especially given the current geopolitical situation.

The key price to watch this week is $64.00. This is the uptrending weekly Gann angle from the August 2107 main bottom at $47.50. Moving at a rate of $0.50 per week, it has been guiding the market higher for 33 weeks.

Look for higher prices on a sustained move over $64.00, but be prepared for a shake out to the downside if this Gann angle fails as support. This move could create enough downside momentum to drive crude oil into the pivot at $62.08.