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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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How To Play The WTI Rally

Deepwater

January West Texas Intermediate crude oil futures are in a position to post another strong close on the weekly chart. Speculation that the OPEC-led program to cut production, trim the global supply and stabilize prices would be extended beyond its March 2018 deadline has laid the groundwork for the current rally.

Stripping out this speculative event and looking at the supply/demand numbers, we’re probably looking at a mixed or sideways market. With the key OPEC meeting scheduled for November 30, the concern for traders should be whether speculators will be able to hold on to current gains for most of this month. There is the possibility that if the rally continues into this meeting and an extension is agreed upon, it may turn into a “buy the rumor, sell the fact” event.

So essentially, over the next three weeks, traders are going to have to decide whether to continue to buy strength or play for a pullback into support. This clash between traders who prefer to play momentum and those who seek value could actually lead to a two-sided trade over the near-term.

Traders have been in this position before. Earlier in the year, they faced a similar challenge when a hedge fund dominated rally drove prices higher for several weeks. The rally died when the hedge funds stopped buying.

Hedge funds are also driving this market higher so it will be up to them to extend the gains beyond recent highs. They tend to be momentum traders so as long as momentum is moving higher, the hedge funds will continue to chase the market.

If momentum begins to slow down, or if it begins to turn lower because of hedging pressure from producers then we could actually see a short-term correction.

Given the two scenarios:  buying strength or playing for value, in my opinion, buying value or a pullback into support will be healthier for the long-term trend. Markets that trend higher by zig-zagging throughout the rally tend to move higher over the long-run. Vertical or spike driven rallies tend to end violently.

This Week’s Facts

Despite expectations for a higher weekly close, we did see some weakness this week. This price action was fueled by a surge in U.S. crude exports to an all-time high and as American drillers pumped near record levels.

The Energy Information Administration’s weekly inventories report showed U.S. crude stocks decreased by 2.4 million barrels during the week-ending October 27. That was better than the 1.8 million barrel estimate, but well short of the American Petroleum Institute’s 5.1 million barrel decline reported on Tuesday.

New data showed the United States exported 2.13 million barrels a day of oil in the week through October 27, the first time the nation has crossed the 2 million-barrels-per-day mark.

In other news, total U.S. crude production came in at 9.55 million barrels a day, just short of the September 29 high going back to July 10, 2015.

News of rising demand was supportive. China’s oil demand growth appears to be accelerating with the country importing roughly 9 million barrels per day, surpassing the United States as the world’s biggest crude importer.

Essentially the numbers told us this week that U.S. production is still the key issue that may put a lid on the rally. The question remains whether higher prices will drive U.S. producers to increase shale output.

Technical Analysis

(Click to enlarge)

The main trend is down according to the monthly swing chart. However, momentum has been trending higher for five months.

The trend will change to up on a trade through the January 2017 swing top at $58.21. The down trend will resume on a move through $43.39.

The major long-term range is $89.98 to $37.92. Its retracement zone at $63.95 to $70.09 is the primary upside target.

The current short-term range is $43.39 to $55.42. If the current rally loses steam and there is a short-term correction then the most likely downside target will be a 50% level at $49.41. A test of this level is likely to attract new buyers.

The main trend is up according to the weekly swing chart. This week, the buying was strong enough to take out the April top at $54.95. If this generates enough upside momentum then look for the rally to extend into the next main top at $58.21.

Taking out $58.21 will put crude oil in an extremely bullish position. This could trigger an acceleration into the major 50% level at $63.95 before the end of the year.

The main range is $58.21 to $43.39. Its retracement zone is $50.80 to $52.55. Crossing to the strong side of this zone is also giving the market a solid upside bias. This zone should be considered support.

If the upside momentum continues then look for a possible acceleration to the upside over $58.21. If the momentum begins to shift to the downside then look for a buying opportunity on a pullback into $52.55 to $50.80.

A failure to hold $50.80 will signal a serious shift in momentum. This will likely lead to a further correction into at least $49.41.




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