U.S. West Texas Intermediate crude oil is trading higher on Friday, but still in a position to close the week lower. In the meantime, gasoline futures are surging. The catalyst behind the price action is the possibility of refinery outages on the U.S. Gulf Coast.
The price action clearly demonstrates that traders are buying refined products such as gasoline and selling crude oil, the primary feedstock at refineries. This move is known as crack-spread buying.
The latest weather reports from the National Hurricane Center indicate that tropical storm Harvey has become a category 2 hurricane with winds of 105 mph, 220 miles off Corpus Christi, Texas.
The Center is also saying that it expects Harvey to strengthen to a Category 3 hurricane with winds of at least 111 mph, which could send the price of gasoline up over 25 cents per barrel.
So far crude oil and gasoline investors are reacting as if this is a temporary event that could play with the inventories numbers for the next week or so.
Crude oil prices are edging higher into the end of the week U.S. petroleum industries prepared for potential output disruptions as the hurricane heads for the heart of the nation’s oil industry between Houston and Corpus Christi, Texas.
With the storm rapidly intensifying, some weather services are already predicting that this may be the biggest hurricane to hit the U.S. mainland in 12 years.
At this time, the forecast calls for the possibility of wind damage and flooding to refineries and shale fields. There is also the possibility of infrastructure damage. This could have a major effect on WTI prices.
Gasoline prices are rising sharply as production at the refineries in the affected area is being shut down in preparation for the hurricane. Some speculators are betting that the closures could last for a while if the storm causes extensive damage.
The price action is currently suggesting the following.
If the refineries are shut down without any damage to infrastructure or oil fields then gasoline is likely to continue to rally and crude oil could weaken due to lower demand expectations.
If the refineries and oil fields receive substantial damage then gasoline and crude oil are both likely to spike higher.
Keep in mind that this is likely to be a short-term event but very volatile. Beyond the storm’s potential impact on the oil industry, crude remains in ample supply globally.
October West Texas intermediate Crude Oil Technical Analysis
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The main trend is down according to the weekly swing chart. The main trend will turn up on a trade through $50.51. The last main bottom is $42.52.
The main range is $58.34 to $42.52. Its retracement zone at $50.43 to $52.29 is the primary upside target and resistance.
The short-term range is $42.52 to $50.51. Its retracement zone at $46.52 to $45.57 is the primary downside target and support.
During the week-ending August 18, crude oil reached a low of $46.62. This proved to be a successful test of the short-term 50% level at $46.52. Buyers are trying to produce a potentially bullish secondary higher bottom.
Bullish traders may have caught a break with the hurricane because we could see a surge to the upside if there is infrastructure damage. This week’s range is trading inside last week’s range. This chart pattern suggests investor indecision and impending volatility.
If the weather triggers a strong enough rally to take out $50.51 then the trend will turn up and $46.62 will become a new secondary higher bottom.
October Gasoline Technical Analysis
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This week’s surge in October Gasoline turned the main trend to up according to the weekly swing chart. The main trend turned up when $1.6846 was taken out. It was reaffirmed when the rally extended through $1.7288.
The new main bottom is $1.5374. A trade through this level will turn the main trend to down.
The main range is $1.8366 to $1.3805. Its 50% to 61.8% retracement zone is $1.6624 to $1.6086. This zone is new support. Trading above this zone is also giving the market an upside bias.
The initial reaction by gasoline traders was triggered by the shutdown of the refineries. If there is infrastructure damage then prices will continue to surge with $1.8366 the next likely target.
If there is no infrastructure damage then prices will begin to pullback into at least $1.6624 to $1.6086.
Taking out $1.5374 will completely eliminate the weather premium.
October Natural Gas
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Natural gas prices are in a position to close higher for the week. Helping to support the market is the government storage report and speculative buying due to the hurricane.
According to the U.S. Energy Information Administration, natural gas in storage in the U.S. rose by 43 billion cubic feet in the week-ended August 18. Traders had priced in a 43 bcf increase.
The EIA also said that U.S. natural gas storage stood at 3.125 trillion cubic feet, 6.7% lower than levels at this time a year ago and 1.5% above the five-year average for this time of year.
The reaction in the market will be determined by the location of the hurricane, if and when, it makes landfall. Natural gas prices could spike higher if there is damage to infrastructure or if production is disrupted.
Weekly October Natural Gas Technical Analysis
The main trend is down according to the weekly swing chart. The market is not close to turning the main trend to up, but there is room to the upside for a meaningful short-covering rally.
The main range is $3.520 to $2.799. Its retracement zone at $3.160 to $3.245 is the primary upside target. Since the trend is down. I expect to see sellers show up on a test of this zone.
The short-term range is $2.799 to $3.042. Its retracement zone at $2.921 to $2.892 has been providing support. Holding above this zone will indicate the presence of buyers. This price action combined with the weather news could create enough upside momentum to trigger a surge into at least $3.160.
Since the main trend is down, if there is a rally, the move is likely to be short-lived. The current supply/demand fundamentals and the chart pattern suggest there needs to be a better support base built in order to sustain a longer-term rally.