With apologies to Sargent Joe Friday from the old Dragnet television series, this week I want to talk about the facts and only the facts, and one big rumor.
This past week can best be described using a quote by former United States Secretary of Defense Donald Rumsfeld, “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”
We know that March Crude Oil futures are set to finish the week lower after posting several volatile sessions this week on the daily chart. If the high and low hold then it will also post the dreaded “inside move” which is typically a sign of investor indecision, but also an indicator of impending volatility. As a trader, you shouldn’t fear volatility, you should embrace. If you feel it is too much to handle then cut down your trading size.
We know that at the week-ended January 29, the U.S. was sitting on a huge stockpile of crude oil, a very strong indication that the global supply glut is getting worse. According to the latest data from the U.S. Energy Information Administration, another 7.8 million barrels of crude oil moved into storage. This was more than two times the estimate, putting current inventory at about 503 million barrels.
Some databases tell us that this is the biggest weekly total since recordkeeping began in 1982. Some old-timers will tell us that back in the 1930’s the supply was this high. When looking at the demand side of the equation, this total tells us that we are producing far more than we are using. Some estimate that this figure may be as high as 2 million barrels per day.
(Click to enlarge)
It makes sense to think that with oil supply at a record high, prices should at the very least be at their contract low. But that is not the case. The market reached its low for the year two weeks ago. Since then it has rallied and consolidated.
A few experts may tell us that the recent surge in reserves was expected because this is refinery season in the U.S. and reserves grow during refinery season. Other will say that domestic shale supply is finally subsiding. Still another group of analysts will tell us that the sharp break in the U.S. Dollar is underpinning crude oil since it is a dollar-denominated commodity.
However, I, like others, believe it is the rumor that OPEC and Non-OPEC countries may finally be sitting down to discuss production cuts that is driving the market higher. After tossing around the idea last week that a meeting could take place, triggering a massive short-covering rally, Russia decided to play trader when it announced that it would be interested in a meeting.
The crude oil market found support on February 3 shortly before the regular session opening after Russia repeated its willingness to take part in talks with OPEC producers to cut output and boost prices. Russian Foreign Minister Sergei Lavrov said there is a consensus among the Organization of the Petroleum Exporting Countries and non-OPEC members to meet, “then we will meet”.
I mentioned that Russia decided to play trader and I meant it. Not only are they producing oil, but they are buying and selling it on the futures exchanges just like any other speculator. They could have mentioned that they were on board for a meeting last week when the market was trading $34.82. Instead, they waited until it retraced the rally from $27.56 and was trading at $29.40 before they decided to make the announcement. This is a typical trader move.
This week’s price action tells me that Russia is holding all of the cards and I think they know it. If they continue to play the rumor game with the market then they are going to create a volatile “zig-zag” pattern on the daily charts by buying dips and selling rallies. As traders we have to prepare for this type of trade because they can continue to work the market with announcements all the way up to $50 a barrel if they like.
(Click to enlarge)
It’s still early, but the “zig-zag” pattern may be beginning. The first rally took us into the retracement zone at $33.55 to $34.96. The leg was $27.26 to $34.82, or $7.26.
The next break took us slightly below the short-term retracement zone at $31.19 to $30.33 where the market bottomed at $29.40. If this bottom is “good” and the Russians are still talking about attending the production meeting then buyers are going to try to take out the 50 percent level at $33.55. If we match the previous rally then the next upside objective will be $36.66.
You can see that $33.55 is the key number to watch because the market hit $33.60 on February 4 and the market sold-off.
All we have to do is take out $34.82 and the main trend will turn up on the daily swing chart. This move will attract more buyers and generate more short-covering. Then it will be off to the races because the next resistance won’t come in until $39.53.
However, it won’t happen unless the Russian’s say da.