Crude oil and gasoline futures are set to finish the week in strong positions as investors continue to bet on a positive outcome from talks regarding a production freeze. Both markets are being driven by tremendous momentum with very little concern about the traditional supply/demand numbers. This is clearly a sign that the market is focused on the future and not the now.
In the natural gas market, the strength from earlier in the summer just doesn’t seem to want to go away as buyers continue to bet that the inventor surplus will end the summer cooling season at relatively low levels going into the fall quiet period and the winter high demand season.
As we near the end of the week, West Texas Intermediate crude oil is sitting at a six-week high and Brent crude oil at an eight-week high. All of this is occurring not because a deal has been reached to freeze production, but because the world’s biggest producers are “preparing” to discuss a possible freeze in production levels. Talk about speculation.
Before the market began its rally on August 3, there were reports showing that hedge funds were dominating the trade with record short positions. Now, we have strong evidence that these funds are paying anything to cover their positions, driving up prices. I wonder what the charts will look like when the hedge funds decide to shift to the long side?
Lingering summer heat is helping bullish natural gas traders to stay in the game a little longer. They continue to speculate that late August heat in key demand areas in the U.S. will put a dent in stockpiles that will prevent the total from reaching a record before the winter.
Unless there is a strong boost in demand, caused by another surge in temperatures, stockpiles are likely to test physical storage limits of 4.3 trillion cubic feet at the end of October. That being said, it’s worth taking a look at the charts to see if there is an opportunity developing for a late summer rally.
Weekly December Crude Oil Technical Analysis
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The main trend is up according to the weekly swing chart and the momentum is to the upside. The current rally showed no sign of letting up even as prices approached a key retracement area early this week. However, this zone will likely continue to act like a magnet, drawing the market back into it while acting like support and a pivot at times.
The main range is $53.62 to $41.58. Its retracement zone is $47.80 to $49.02. These two levels are support next week.
If the upside momentum continues, we should see a test of a downtrending angle at $50.87. Although we may see a technical bounce on the first test of this angle, if the buying continues then the rally should extend over this potential resistance angle and into possibly the next two downtrending angles at $52.25 and $52.93. The latter is the last angle before the $53.62 main top.
If this nearly $10.00 has been fueled by short-covering like some say then eventually it will stop and real buyers will have to take over. The question at that time will be whether to continue to buy strength so close to the high for the year, or play for a pull-back into a value area.
Weekly December Unleaded Gasoline Technical Analysis
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The main trend is down according to the weekly swing chart, however, like crude oil, the momentum is clearly to the upside.
The short-term range is $1.4654 to $1.1800. Its retracement zone is $1.3227 to $1.3564. Earlier this week, gasoline crossed to the strong side of the retracement zone, putting it in a bullish position. It will continue to have a strong upside bias as long as the retracement zone holds as support.
The upside targets are staggered this week at $1.4104, $1.4379 and $1.4514. If the upside momentum is strong enough to take out the top at $1.4654 then the main trend will change to up, making $1.5315 the next major target.
Weekly December Natural Gas Technical Analysis
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The main trend is up according to the weekly swing chart, but momentum has been pointing lower since the week-ending July 1.
The short-term range is $2.760 to $3.368. Its retracement zone at $3.064 to $2.992 is currently being tested. Buyers are trying to establish a support base inside this zone. The price action at the end of the week indicates that upside momentum may be building.
As we approach the end of the week, the December futures contract is trading on the strong side of the retracement zone and on the bullish side of a downtrending angle that had been guiding the market lower for seven weeks. These prices are $3.064 and $3.088 respectively.
Holding above $3.088 next week may generate enough upside momentum to drive the market into the next resistance angle at $3.228. At this point, investors will have to decide if they want to keep increasing bets on the weather being hot enough to drive up demand. Hedgers will also be coming in, but they will be looking for favorable prices to initiate fresh short positions.
Upside momentum should continue to drive up crude oil and unleaded gasoline. However, conditions could shift if there is any negative news regarding the possible production freeze. This is a news driven market and traders can change their minds fast. As we approach the highs for the year, keep in mind that momentum may begin to slow unless there is fresh news or an aggressive wave of buying from investors will to buy strength.
Natural gas is also highly speculative at this time because it is being weather driven. However, there is room to the upside for at least one more surge. Aggressive speculators may want to play for this move before hedgers take control.