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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Oil At A Crossroads Ahead Of Crucial OPEC Meeting


August West Texas Intermediate crude oil futures are in a position to close higher for the week as investors prepare for next week’s OPEC meeting in Vienna on June 22-23. Investors shouldn’t read into this week’s modest gain because the strength was likely generated by short-covering and position-squaring. The relatively low volume over the past two weeks suggests that the major players have taken to the sidelines due to the uncertain outcome of negotiations at the OPEC meeting.

Heading into next week’s meeting, attendees are going to have to address rising U.S. output and uncertainty over the outlook for supply because of economic turmoil in Venezuela and the upcoming sanctions against Iran. However, given the recent limited gains, it looks as if investors have priced in the possibility OPEC and other major producers will agree to higher output.

One major concern is that oil giants Saudi Arabia and Russia are going to push for increased production at next week’s OPEC meeting.

The notion that Saudi Arabia and Russia will push for more output was supported by Russian Energy Minister Alexander Novak who said after talks with Saudi Energy Minister Khalid al-Falih in Moscow that both nations “in principle” supported the gradual exit from the deal that was aimed at trimming the global supply and stabilizing prices.

“We in general support this … but specifics we will discuss with the ministers in a week,” Novak said, adding that one option would involve gradually hiking output by 1.5 million bpd, possibly starting from July 1.

Saudi Arabia’s al-Falih did not offer specific guidance on what any deal in Vienna could look like. But he said: “We will see where we go, but I think we’ll come to an agreement that satisfies, most importantly, the market.”

The Fundamentals

After wallowing slightly above its near-term low earlier in the week, crude oil moved higher after U.S. government data showed a bigger weekly draw than expected in domestic crude inventories.

According to the U.S. Energy Information Administration, crude inventories fell by 4.1 million barrels in the week-ending June 8. Traders were expecting a decrease of 2.7 million barrels. Total crude oil supply is now at 432.4 million barrels.

Gasoline inventories dropped 2.3 million barrels, with the average daily production at 10.5 million barrels, versus a huge 4.6 million barrel build and daily production of 9.7 million barrels a week-earlier.

Distillate inventories last week were down by 2.1 million barrels, which compares with a build of 2.2 million barrels in the prior week. Distillate production in the week to June 8 averaged 5.1 million barrels daily, versus 5.3 million bpd in the previous two weeks.

Bulls Face Potential Headwinds

Despite reports of strong gasoline demand, the market is still facing increasing headwinds. The latest updates indicate that Russia may offer its OPEC partners a return to production rates from October 2016, which most participants in the OPEC-led deal to reduce production took as a basis for the cuts in output. Russia itself agreed to cut 300,000 bpd from its October production average, which was a record 11.2 million bpd.

Additional headwinds were provided by a report from Reuters that showed crude oil in floating storage in Europe had hit an 18-month high, at 12.9 million barrels, or over a quarter of global floating storage.

Now that OPEC and its partners had achieved its main objective of rebalancing the oil market, they are likely to begin increasing production to meet the strong demand.

The trick at this time is to hold the supply/demand situation in balance until the June 22-23 meeting then try to put a more stable plan into place.

Technical Analysis

(Click to enlarge)

The main trend is up according to the monthly swing chart. However, momentum has shifted to the downside with the technically bearish closing price reversal top in May and its subsequent confirmation in early June.

A trade through $72.70 will negate the bearish chart pattern and signal a resumption of the uptrend. The market is in no position to change the monthly trend to down, but there is plenty of room for a correction.

The main range is $89.45 to $39.88. The market is currently trading inside its 50% to 61.8% retracement zone at $64.67 to $70.51. This zone is controlling the longer-term direction of the market.

The minor range is $45.08 to $72.70. Its retracement zone target is $58.89 to $55.63.

Technical Forecast

Based on this month’s price action, the direction of the August WTI crude oil market is likely to be determined by trader reaction to the 50% level at $64.67.

A sustained move over $64.67 will indicate that buyers are still coming in to support the oil market. If this creates enough upside momentum then look for the rally to possibly extend into $70.51 then $72.70.

A sustained move under $64.67 will signal the presence of sellers. This could trigger an acceleration to the downside with $58.89 to $55.63 the next major downside target.

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