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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Hedge Funds Hold The Cards For The Next Move In Oil

Trading Screen

January West Texas Intermediate crude oil futures are showing a muted response to the news that the OPEC-led group agreed to extend their production cuts in a widely expected move designed to trim the supply glut and stabilize prices.

OPEC and non-OPEC producers led by Russia on Thursday agreed to continue the production cuts until the end of 2018, while also signaling a possible early exit from the deal if the market overheats.

WTI crude oil traders reacted as if the OPEC news had been fully-priced into the market. The WTI futures contract is holding above a key area on the daily chart at $57.03 to $56.55, indicating the presence of buyers. A sustained move $57.03 will be bullish, a sustained move under $56.55 will be bearish over the near-term.

(Click to enlarge)

The daily swing chart indicates there is plenty of room to the upside if $59.05 is taken out with conviction. If this attracts increasing volume then we could see an eventual move into the July 14, 2015 main top at $61.88.

On the downside, the main trend will change to down on a trade through $56.75. After clearing this price and the short-term Fibonacci level at $56.55 when we could see the start of a steep break with the first target a support cluster at $55.07 to $55.00.

According to Kiyoshi Homma, a director at Japanese refiner Idemitsu Kosan, “Oil prices are likely to hover around current levels till next June, when stockpiles would be optimized through continued production cuts, but the market will likely tighten after that.”

Goldman Sachs said, OPEC is showing “a strong commitment to normalizing inventories and also to remain data dependent, which reduces the risk of both unexpected supply surprises and excess stock draws.”

The OPEC news is friendly, but issues remain over increasing U.S. production. This is likely to cap gains. Last week, U.S. oil production hit a new record of 9.68 million barrels per day. The combination of these two events is likely to hold prices in a range with most traders being cautious about playing either side of the market too aggressively.

Now it’s up to the hedge funds. They are sitting on large long positions. Now that the OPEC news is out, the question remains whether they will continue to maintain their long-term bullish outlook or start trimming positions by taking profits.

(Click to enlarge)

The main trend is up according to the weekly swing chart. A trade through $59.05 will signal a resumption of the uptrend. If this move gains traction and is support by rising volume, we could see the rally extend into a major 50% level at $63.95 over the near-term.

The short-term range is $46.95 to $59.05. Its retracement zone at $53.00 to $51.57 is support. Since the main trend is up. This zone should draw the attention of buyers since it represents value.

Slightly above the recent high at $59.05 is an uptrending Gann angle. It comes in at $60.95 during the week-ending December 8. Crossing to the strong side of this angle will put January WTI crude oil futures in an extremely bullish position.

If the buying pressure dries up, or if the hedge funds decide to book profits and play for a better entry price then we could see the start of a sell-off with the primary downside targets coming in at $53.95 to $53.00.

Conclusion

I believe the hedge funds are holding all the cards at this time. We could see a breakout to the upside if they decide to continue to buy aggressively on a move over $59.05 then $60.95.

If an attempt to breakout fails and the hedge funds turn into sellers then this will indicate they are playing for a pullback into a value area like $53.95 to $53.00. This area is a long way off from current prices, but the OPEC deal means that it has bought time for the market to balance. If the hedge funds also believe that they have time, I don’t think they are going to be too interested in buying at current price levels especially with the end of the year coming up. They will be more interested in booking profits, making their annual numbers look good and playing for better entry levels in anticipation of the next rally.




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