It was a pretty uneventful week in the crude oil market with prices consolidating as investors continued to digest the previous week's decision by an OPEC-led group of producers to trim output starting in January. The most action in the energy complex was in the natural gas market where sellers took control amid uncertainties and inconsistencies in the medium-term weather forecasts.
Crude Oil
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower for the week. An easing of tensions over U.S.-China trade relations helped underpin the markets earlier in the week. However, gains were capped and prices retreated following reports of weaker than expected economic activity in China. These reports raised concerns over future demand from the world's second-largest economy.
Additionally, it was reported that oil refinery throughput in November in China fell from October, which was the second-highest month on record, suggesting an easing in Chinese oil demand.
Refineries processed 50.46 million tonnes of crude oil last month, or 12.28 million bpd, up 2.9 percent from the same month last year, the National Bureau of Statistics reported. That figure is down from October and from the record of 12.49 million bpd reported in September. Finally, for the first 11 months of the year, refinery output gained 7.2 percent to 554.48 million tonnes, or 12.12 million bpd, on track for an annual record.
Underpinning the markets was optimism over the OPEC-led strategy to trim production by 1.2 million barrels starting on January 1. Traders are hoping the move alleviates the oversupply situation and stabilizes prices.
Crude Oil Technical Analysis
(Click to enlarge)
The main trend is down according to the daily swing chart. However, momentum has shifted slightly to the upside following the closing price reversal bottom the week-ending November 30 and the subsequent confirmation the week-ending December 7. This week's inside trading range suggests investor indecision and impending volatility.
A trade through $54.77 will indicate the buying is getting stronger. This could generate the upside momentum needed to challenge the major Fibonacci level at $57.71.
A move through $49.60 will negate the closing price reversal bottom and signal a resumption of the downtrend. This could lead to an eventual test of a pair of bottoms at $47.97 and $46.15.
We're seeing a similar chart pattern in the February Brent crude oil market. The main trend is also down, but a closing price reversal bottom the week-ending November 30 is helping to hold the market in a trading range. A trade through $57.78 will negate the closing price reversal bottom and signal a resumption of the downtrend.
Overcoming the Fibonacci level at $62.97 will indicate the buying is getting stronger. Taking out the high at $63.71 could trigger an acceleration to the upside with $67.30 the next major target.
Conclusion
Both WTI and Brent crude oil could continue to consolidate into the first of the new year, or until the new production cuts start. At this point, a major shift in the fundamentals has to take place in order to encourage the hedge funds to cover their short positions aggressively. They are still decisively short because they are primarily focusing on the strong possibility of lower demand due to trade war concerns and a slowing global economy.
Natural Gas
Natural gas futures are in a position to finish the week sharply lower. Traders are reacting to a shift in the shorter-term weather pattern that is calling for milder temperatures into Christmas. Uncertainty over whether colder temperatures will return after December 25 is also weighing on prices.
Milder temperatures are expected to return next week, which should reduce supply. This is currently being priced into the market. Further out, however, there is uncertainty and a few inconsistencies as to if or when colder temperatures will return.
Some weather forecasters are saying there is still a decent shot of cold into December 23-24 but with conditions moderating across the important eastern demand areas December 25-27.
Natural Gas Technical Analysis
(Click to enlarge)
The main trend is up according to the weekly swing chart. However, momentum is starting to shift to the downside. A trade through $3.111 will change the main trend to down, while a move through $4.849 will signal a resumption of the uptrend.
At this time I don't see a scenario where the trend changes to down. There is just too much time left in this winter season for colder temperatures to return.
The main range is $3.111 to $4.849. Its 50% to 61.8% retracement zone at $3.980 to $3.775 is currently being tested. This zone is controlling the momentum in the market.
In order to strengthen the upside momentum, buyers are going to have to overcome then sustain a rally over the 50% level at $3.980. This move may be enough to scare a few of the weaker short-sellers out of the market. The rest of the move will have to be determined by the weather.
Prices could hover at or near $3.980 if cold weather returns, but it's going to take a lingering cold spell to trigger an acceleration to the upside.
A sustained move under $3.775 will indicate the selling pressure is getting stronger. This could trigger an acceleration to the downside. There is room on the chart all the way down to $3.111, but I don't think this price will be challenged over the near-term.
The best scenario for bullish traders will be a consolidation inside $3.980 to $3.775. Buyers need to reestablish a support base in order to allow for colder weather to return.
Basically, look for an upside bias to develop this week if buyers can sustain a rally over $3.980. Look for the short-term bias to continue on a sustained move under $3.775.
By Jim Hyerczyk for Oilprice.com
Fundamental and technical analyst with 30 years experience. More