Is This Oil Price Rally Grinding To A Halt?

U.S West Texas Intermediate and international-benchmark Brent crude oil futures were trading near an 8-week high as of early Friday after posting four straight sessions of higher closes. Support continued to be provided by last week's huge inventory draw down as reported in Tuesday's American Petroleum Institute's report and Wednesday's U.S. Energy Information Administration's inventories report. Buyers also like Saudi Arabia's plan to cut exports. 

Late Tuesday, industry group the American Petroleum Institute reported U.S. crude stockpiles fell by 10.2 million barrels the week-ending July 21. This helped provide support early in the session.

On Wednesday, the U.S. Energy Information Administration reported a 7.2 million barrel drop in inventories last week. Investors were looking for a 3.3 million barrel draw. The draw was the fourth consecutive drop, indicating a trend and giving support to the market.

Gasoline inventories fell by 1 million barrels. Analysts were looking for a 614,000-barrel drop. Distillate stockpiles declined by 1.9 million barrels, versus expectations for a 453,000-barrel drawdown.

Rebalancing Theory

Bullish investors are supporting the market because they believe the long-awaited rebalancing is taking place in the oil market and at a much faster pace than expected. They are basing on the rally on Saudi Arabia's decision to limit oil exports to 6.6 million barrels per day (bpd) in August, and the four weeks of drawdowns in U.S. oil stocks.

Traders are also saying the combination of higher exports from the United States, a marginal decline in oil output and a rise in refinery utilization rate were also behind the price rise. Some have also added the geopolitical risk in Venezuela to the bullish side of the equation.

There are also skeptics out there who believe the upside will be limited because the U.S. crude and gasoline stock piles remain above their five-year averages.

U.S. Production News

In other news, U.S. shale producers including Hess Corp., Anadarko Petroleum and Whiting Petroleum this week announced plans to cut spending this year as a result of low oil prices.

Despite this news, investors still want to see proof that the spending cuts will have a significant impact on U.S. production. They feel that the upside may be limited because the recent surge in prices may actually encourage more output, particularly from U.S. shale producers with low costs.

The key report will be the Friday's Baker Hughes rig count. Bullish traders will be looking for further signs of slowing shale drilling. The market will also be sensitive to headlines from Venezuela with the U.S. Congress' D-day for sanctions approaching on July 30.

While most investors were watching the EIA report on Wednesday, the Trump administration imposed sanctions on 13 senior Venezuelan officials and others close to President Maduro's regime. Some called the sanctions relatively modest, but American officials stressed that it was merely a first shot in reigning in the regime.

This is important to the oil market because the two countries' economies are tightly intertwined through the oil that Venezuela sells to the United States. According to the latest data, it accounts for roughly 10 percent of the oil America imports. Also Washington has powerful tools at its disposal, including a complete prohibition on Venezuelan oil.

Conclusion

Although September West Texas Intermediate crude oil is trading on the strong side of a key retracement zone, all of this activity is taking place on the daily charts. The weekly chart and monthly charts are still bearish. This suggests investors should continue to be cautiously optimistic about the recovery.

In order to support the rally, the data much continue to show inventories draws, declines in the rig count and stronger demand. Buyers should also pay attention to U.S. shale output because these producers can ramp up production rather quickly to take advantage of rising prices.

Weekly September WTI Crude Oil Technical Analysis

(Click to enlarge)

The main trend is down according to the weekly swing chart. The trend will turn up on a trade through $52.38. A trade though $42.27 will signal a resumption of the downtrend.

The short-term range is $52.38 to $42.27. Its 50% level or pivot is $47.33. The market is currently trading on the strong side of the pivot so we can safely say that momentum is to the upside.

The main range is $54.77 to $42.27. Its retracement zone at $48.52 to $50.00 is currently being tested. Holding above its 50% level at $48.52 is further confirmation of the developing upside bias.

The range for the year is $58.36 to $42.27. Its 50% level or pivot is $50.31. This price may be the most important number on the weekly chart at this time. If the market runs into resistance at this price then all we will be able to conclude is that we've seen a rally in a bear market.

Yes, crude oil hit bear market status about a month ago when it reached a level that represented a 20% decline from its high for the year.

If buyers can overcome $50.31 then we may be able to conclude that the rally is strengthening. This is only likely to happen if new buyers are willing to buy strength. Because of the prolonged move down in price and time, it is going to take a combination of aggressive counter-trend buying and massive short-covering to actually convince me that the trend is getting ready to turn up.

This could start on Friday with the release of the Baker Hughes rig count report.