Mixed news drove crude oil prices in both directions this week before traders decided the way of least resistance was up.
On the bullish side, the market was supported by U.S. Energy Information Administration remarks from earlier in the week calling for U.S. crude oil production to rise by less than previously forecast next year due to a lower price outlook.
Weekly U.S. government inventories even fell more than expected.
Saudi Arabia’s threat to reduce exports in August was also seen as a potentially bullish development. Early Thursday, reports of strong demand from China eased concerns of an ongoing fuel supply overhang.
Limiting the upside was rising U.S. production, steady growth in producing oil rigs and increasing production in Libya and Nigeria. Late in the week, the International Energy Agency even warned the oil market could stay oversupplied for longer than expected due to rising production and limited output cuts by some members of OPEC.
Several banks issued bearish forecasts with Goldman Sachs saying prices could fall below $40 if the market doesn’t get a clear catalyst to buy. The catalyst could be further intervention by OPEC or a steady drop in U.S. crude stockpiles and the nation’s rig count, the bank said.
Bullish traders didn’t seem to mind the two-sided trade and as of Thursday’s close, it looked as if they had shrugged off the negative news, choosing instead to let the price action dictate direction.
I don’t think it was one particular story this week that fueled the turnaround. I think that buyers recognized value early in the week on the dip on Monday and the rest of the week, these investors successfully defended their positions against sellers.
Daily September West Texas Intermediate Crude Oil Swing Chart Analysis
Following a prolonged move down in terms of price and time, the first rally up from a bottom is typically fueled by short-covering. This is usually followed by a 50% to 61.8% correction of the first rally. If this a market is ready to move higher, real buyers start to come in on this correction after the objective has been reach. If the buying is strong enough then the next move often equals or exceeds the first rally in terms of price and time.
The first rally was $42.27 to $47.45, or $5.18 in 9 market sessions. The next swing bottom was formed at $43.83. Our short-term forecast according to the daily swing chart calls for a 9 day rally of $5.18. This makes our next potential objective $49.01 on July 21.
This is our forecast based on swing chart analysis, it is not an absolute. The market still has to be monitored daily for deviations. For example, if $43.83 is violated, the forecast is negated. On the positive side, a follow-through move through this week’s high at $46.65 will tell us the market is still on course. Taking out the main top at $47.45 will not only reaffirm the uptrend, but it will also give us confidence in our forecast.
Swing charts are useful tools for traders, however, it is actual volume that drives the market. In this case, the stronger the buying volume, the greater the odds our objective will be met.
Price could get ahead of time and the market could hit $49.01 before the target date. This would be a decision point for a long trader. They will have to decide whether to play for more upside, or at the very least, move stops up to protect their position.
Price could also fall behind time. In this case, the rally stagnates and never reaches the target by the due date. Long traders will have to decide at that time to exit the trade and wait for a new set-up, or stay with the trade to see if the target is eventually hit. This is risky because it’s always dangerous to go against the forces of price and time.
Weekly September West Texas Intermediate Crude Oil Technical Analysis
(Click to enlarge)
The main trend is down according to the weekly swing chart, however, momentum has been trending higher since June 21.
A trade through $42.27 will signal a resumption of the downtrend with the first target the April 15, 2016 bottom at $42.18. A move through $47.45 will change the minor trend to up.
The main range is $52.38 to $42.27. Its retracement zone is $47.33 to $48.52. This zone stopped the rally last week when the market hit $47.45.
The short-term range is $42.27 to $47.45. Its retracement zone at $44.86 to $44.25 is providing support this week.
Look for an upside bias to develop as long as $44.86 to $44.25 holds as support. A move through the 50% level at $47.33 will indicate the buying is getting stronger. This could lead to a further move into the Fibonacci level at $48.52. This is the trigger point for an acceleration to the upside.
The combination of the daily and weekly crude oil charts strongly suggests the market has turned the corner and is set up for a potential rally. If the rally begins to pick up traction then we could see a short-term rally to at least $49.01 next week.
The market was saturated with news this week, but in my opinion, most of it dealt with the long-term. Over the short-term, the most important factors are U.S. production and the rig count. We should know on Friday if the market has a chance to reach our objective during our time frame if Baker Hughes reports a decline in the weekly rig count.