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Has Oil Bottomed Out?

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are in a position to finish mixed for the week based on Friday’s price action. Not only is this significant from a technical analysis standpoint, but because it highlights the divergence in concerns over rising U.S. supply and somewhat tighter Brent supply.

Brent is outperforming WTI this week because the supply issues are being generated by rising U.S. inventories and production. Brent supply is being controlled by the OPEC-led supply cuts and the U.S. sanctions against Iran and Venezuela.

Both markets, however, are being influenced by concerns that a weakening global economy will lead to lower energy demand.

Rising U.S. Supply Keeping Lid on Prices

Crude oil prices plunged on Wednesday after the EIA reported a weekly build in crude oil inventories of 6.8 million barrels. Traders were looking for a 1.7 million barrel draw down. The EIA also said that total stockpiles are now at 483.3 million barrels, 5 percent above the seasonal average.

The EIA report also showed gasoline stockpiles rose 3.2 million barrels during the week-ending May 31. This compares with a decline of 600,000 barrels a week earlier. Gasoline production averaged 10 million bpd last week, compared with 10.1 million bpd a week before.

Distillate fuels also rose. The EIA reported an inventory build of 4.6 million barrels, compared with a small draw of 200,000 barrels a week earlier. Refineries produced 5.4 million bpd of distillates during the week-ending May 31, up from 5.1 million bpd a week earlier.

OPEC-led Supply Cut Extension Supportive

Prices were being supported late in the week by friendly comments from Saudi Energy Minister Khalid al-Falih. He said at a conference in St. Petersburg, Russia that $60 a barrel was too low to encourage investment in the industry.

Falih said he did not want to boost Saudi production to make up for a lower oil price and that a return to the price-crash environment of 2014-15 was unacceptable. This statement suggests the cartel and its allies could tighten even further once it ratifies the extension of its original January 1 agreement to cut out, trim global supplies and stabilize prices, beyond the June 30 deadline.

Other Factors

At the end of the week, investors are also paying close attention to the negotiations between the United States and Mexico over illegal immigration and 5% tariffs that are scheduled to kick in on Monday, June 10. If the U.S. follows through on its threat then Mexico could retaliate with tariffs of their own. This could have an impact on crude oil prices.

Furthermore, on Friday, the U.S. government non-farm payrolls report came in below expectations. This indicates a slowing economy, which is potentially bearish for demand. Crude oil fell from its highs on the news.

Technical Analysis

Weekly July WTI Crude Oil Technical Analysis

WTI

The main trend is down according to the weekly swing chart. The downtrend was reaffirmed this week as follow-through selling pressure took out the previous week’s low. If the downside pressure continues then look for an eventual test of the next main bottom at $44.20.

The main trend will change to up on a trade through $63.96. This is highly unlikely at this time, but due to the steep sell-off, the market is in a position to form a potentially bullish higher close or closing price reversal bottom.

This chart pattern will not change the trend to up either, but it could generate enough upside momentum to fuel a 2 to 3 week counter-trend rally. A close over $53.50 on Friday will produce this chart pattern.

The short-term range is $44.20 to $66.44. Its 50% to 61.8% retracement zone is $55.32 to $52.70. This zone is controlling the near-term direction of the market.

On Friday, the market is trading inside this zone indicating the buying may be getting stronger, or the selling weaker. Holding above the lower level at $52.70 will indicate the presence of buyers.

The longer-term range is $75.20 to $44.20. Its retracement zone is major resistance. It is also controlling the longer-term direction of the market.

Weekly July WTI Crude Oil Technical Forecast

The direction of the futures contract the week-ending June 14 will be determined by trader reaction to the retracement level at $52.70.

Bullish Scenario

A sustained move over $52.70 will indicate the presence of buyers. If this move creates enough upside momentum then look for the rally to possibly extend into the 50% level at $55.32.

Overcoming $55.32 will indicate the buying is getting stronger. This could trigger a further rally with potential targets coming in at $56.20 to $57.20. The latter is the trigger point for an acceleration to the upside with $59.70 the next major upside target.

Bearish Scenario

A sustained move under $52.70 will signal the presence of sellers. This could trigger a break into an uptrending Gann angle at $50.20. Look for a technical bounce on the first test of this angle.

If $50.20 fails as support then look for the selling to possibly extend into the next uptrending Gann angle at $47.20. This is the last potential support angle before the $44.20 main bottom.


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