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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Impending Volatility In The Oil Markets

Trading Screen

This week’s price action in the crude oil market suggests that last week’s huge sell-off may have been a liquidation break or the break designed to drive out the weakest longs. If you recall, prior to the sell-off, hedge fund and money managers were sitting in record long positions in crude oil.

After trading lower earlier in the week, crude oil started to make a comeback and is now in a position to post a major reversal to the weekly chart. This price action suggests impending volatility and investor indecision. Despite last week’s steep sell-off, this week’s response by investors suggests the market may be going through a transition period as the bearish investors battle it out with the bullish speculators.

On one hand, the bullish speculators are placing high hopes on a weaker dollar and OPEC-lead output cuts to underpin prices. Bearish investors are saying that rallies will continue to be capped as long as U.S. crude remains near record levels.

Prices are being supported this week by the U.S. Energy Information Administration’s weekly inventories data which showed supply decrease for the first time in nine weeks, dropping 237,000 barrels from a record high.

The Fed’s less-hawkish monetary policy statement has been pressuring the U.S. Dollar since Wednesday. This seems to be having a positive influence on the dollar-denominated crude oil market because it may be helping to increase foreign demand.

Earlier in the week, prices were supported by comments from the International Energy Agency (EIA). It said that although global inventories rose in January, the agency predicts the oil market could be in deficit by 500,000 barrels per day in the first half of 2017.

The comments by the IEA are particularly interesting because they strongly suggest that OPEC could start putting a dent in the global supply glut if it were to continue its program to curb production for several months beyond the original June deadline.

On Thursday, OPEC member Kuwait said this week that it was ready to prolong the deal to reduce supply. But OPEC heavyweights Saudi Arabia, the world’s biggest oil exporter, has said it is too early to consider an extension.

Over the near-term crude oil prices are likely to be influenced by the U.S. Dollar, the Baker Hughes rig count and any new developments regarding an extension of OPEC’s plan to reduce production, trim inventory and stabilize prices.

Technical Analysis

Weekly June West Texas Intermediate Crude Oil

(Click to enlarge)

The main trend is up according to the weekly chart, however, momentum has been trending lower. A trade through $46.25 will change the main trend to down.

The main range is $36.18 to $57.95. Its retracement zone is $47.07 to $44.50. This remains the primary downside target.

On the upside, the first target is the 50% level at $51.44, followed by $55.04.

With the bullish and bearish news balancing each other, prices are likely to remain between $51.44 and $47.07.

If the story of an extension of the OPEC program to curb production begins to grow legs, then look for firmer prices.

If supply continues to increase in the U.S. then gains are likely to be capped and prices could retreat to $47.07 to $44.50.

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