Crude oil and natural gas futures are sharing a similar pattern this week. Both markets reached their lows early on before sitting in a range the rest of the week. The chart patterns suggests investors are playing the waiting game. Crude traders are waiting for the start of the OPEC-led production cuts on January 1. Natural gas traders are waiting for a possible return of cold weather next week-end. So basically, we're looking at chart patterns that suggest investor indecision and impending volatility.
Crude Oil
There has been very little news this week, which is typical of the holiday season. Helping to limit gains are concerns over the partial government shutdown that may not come to an end until January 4, and renewed concerns over the trade dispute between the U.S. and China. Investors are also worried about the supply glut and whether the OPEC-led production cuts will help trim the excess and stabilize prices.
A strong recovery in U.S. equity markets helped oil prices recover on Wednesday, but a bearish inventories report on Thursday from the American Petroleum Institute pushed prices lower. Another dramatic turnaround to the upside in the stock market is helping to provide some light support on Friday shortly before the release of the U.S. Energy Information Administration weekly inventories report.
Short-Term Recap
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading better Friday morning. The markets are attempting to recover from Thursday's weakness. The early catalyst is increased demand for risky assets. Stocks are following through to the upside after yesterday's dramatic reversal bottom. This is helping to encourage a few of the weaker crude oil short-sellers to pare positions. Later today, investors will get the opportunity to react to the latest inventories report from the U.S. Energy Information Administration at 1600 GMT. It is expected to show a small draw down.
API Reports Increased Supply
Crude oil futures tumbled late in the session on Thursday after the American Petroleum Institute (API) reported an unexpected crude oil inventory build of 6.9 million barrels for the week-ending December 21. The number exceeded analyst estimates of 2.869 million barrels. This figure only added to the supply uncertainty in this market after the API reported a more than 3 million barrel build last week, followed by a U.S. Energy Information Administration weekly inventories report that showed a draw of 500,000.
Inventories at the futures hub in Cushing, Oklahoma also climbed this week by 1.8 million barrels.
The API also reported a build in gasoline inventories for the week-ending December 21 of 3.7 million barrels. This was well above the estimate of 28,000 barrels. Distillate inventories, however, fell last week by 598,000 barrels. Traders were looking for a draw of 529,000 barrels.
Russian Energy Minister Novak Speaks
Russian Energy Minister Alexander Novak said on Thursday that rising protectionism and the unpredictability of the U.S. administration had greatly contributed to global oil price volatility over the past two years.
Novak also said Russia would cut its crude output by between 3 million and 5 million tonnes in the first half of 2019 as part of a deal between producers.
Technical Analysis
Weekly Nearby West Texas Intermediate Crude Oil Technical Analysis
(Click to enlarge)
The main trend is down according to the weekly price swing chart. The market isn't close to changing the main trend to up, but due to the prolonged move down in terms of price and time, and other technical oversold indicators, the market is ripe for a lower-low, higher-close chart pattern. This is typically called a closing price reversal bottom.
A closing price reversal bottom will not signal a change in trend, but it will indicate the buying may be greater than the selling at current price levels. If formed then confirmed, we could see a strong 2 to 3 week counter-trend rally.
The time for this potentially bullish chart pattern couldn't be better as we approach the start of the OPEC-led production cuts on January 1.
As far as price is concerned, the February WTI crude oil futures contract is hovering just above an 18-month bottom at $41.80 and a nearly 3-year bottom at $38.73.
Going into Friday's close, finishing above $45.59 will produce a closing price reversal bottom this week. If formed, we could see a follow-through rally next week. A rebound rally in the stock market would be a big help in pulling this market out of its bearish hole.
Natural Gas
Natural gas futures posted another wide trading range this week as investors continued to react to the mild weather and the forecasts for the possible return of cold temperatures next week-end. At times, investors ignored potentially bearish weather reports, reacting instead to the expiration of the January futures contract.
Traders expect the weather to remain relatively mild until next week-end when colder weather systems are expected to move across the country. This should lead to an increase in national demand. This should provide some support. However, the size of any rally will be determined by the temperatures and the length of the cold snap.
The consensus in this week's U.S. Energy Information Administration's weekly storage report is expected to show a withdrawal of about 50 Billion Cubic Feet during the week-ending December 21.
Forecast
The year is expected to end with stocks about 20 percent below the five-year average. This means the market will still be sensitive to the return of cold temperatures despite the current downtrend. Continue to expect to see above average volatility especially with the forecasts showing increases chances of colder weather late next week.
Technical Analysis
March Natural Gas Technical Analysis
(Click to enlarge)
The main trend is up according to the weekly swing chart. However, momentum is trending lower. The trend will change to down on a trade through the last main bottom at $2.890.
The main range is $2.890 to $4.608. Its 50 percent to 61.8 percent retracement zone is $3.749 to $3.546. Trading below this zone is helping to generate the downside momentum. This zone is currently resistance.
Although the trend is up, bullish traders are trying to find value. The best value is near $2.890.
If buyers can't get their price then they will be forced to buy strength. The first sign of strength will be a sustained move over $3.546. Overtaking $3.749 will indicate the buying is getting stronger.
Basically, look for the downside pressure to continue on a sustained move under $3.546. Watch for a shift in momentum to the upside on a sustained move over $3.749. This will be determined by the next weather pattern.
By James Hyerczyk for Oilprice.com
Fundamental and technical analyst with 30 years experience. More