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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Oil Markets Prepare For An End-Of-Year Rally

Rig

November West Texas Intermediate crude oil is in a position to close sharply higher for the week in reaction to a bullish report from the International Energy Agency (IEA).

According to the IEA, global oil demand is set to accelerate faster than anticipated this year. Strong second-quarter demand has buoyed oil markets, which have been struggling to rebalance as a supply glut has weighed heavily on prices, the IEA said in its September report released on September 13.

With the IEA growing more confident that shifting fundamentals are enabling demand to catch up with supply, it looks like investors are also gaining confidence based on this week’s price action. The price action on the daily chart was the first time in a while where investors actually looked confident buying strength.

The raw data in the IEA report strongly indicates that a rebalancing of the market is underway. The IEA increased its growth estimate for the year to 1.6 mb/d, or 1.7 percent. For 2018, the IEA is predicting growth of 1.4 mb/d, or 1.4 percent.

In August, the IEA has anticipated annual growth would hit 1.5 mb/d, again an increase on July’s 1.4 mb/d forecast.

U.S. Energy Information Administration Report

In other news, U.S. crude stockpiles rose sharply last week and gasoline inventories fell the most on record as refineries continued to be hampered by damage from Hurricane Harvey, the Energy Information Administration (EIA) said on Wednesday.

Crude inventories rose 5.9 million barrels, compared with analysts’ expectations for an increase of 3.2 million barrels.

The EIA also said refinery utilization rates fell by 2 percentage points to 77.7 percent, the lowest rate since 2008, as crude runs fell 394,000 bpd.

Gasoline stocks fell 8.4 million barrels, the largest draw on record. Analysts were looking for a 2.1 million-barrel drop.

Distillate stockpiles fell 3.2 million barrels, versus expectations for a 1.5 million-barrel drop, the EIA data showed.

Finally, U.S. crude imports fell last week by 1.2 million bpd to 5.7 million bpd, the lowest on record. U.S. crude exports fell to 6.5 million bpd, the lowest since 2014, when crude export restrictions were first relaxed.

Forecast

Traders know that the EIA report was a hurricane-altered report, so I believe this week’s rally was primary fueled by trader reaction to the IEA’s bullish outlook.

With IEA saying the global oil glut was shrinking thanks to strong European and U.S. demand, as well as production declines in OPEC and non-OPEC countries, I think the groundwork has been laid for higher prices, however, investors haven’t decided if they prefer to buy dips or buy strength.

This week’s price action tells me that traders are leaning to the upside, but will only buy strength if supported by news. During periods when news is scare, prices may drift sideways-to-lower as investors seek value. During news driven periods, investors are going to go after offers with strong upside momentum.

The next major news event that could send the market over the top will be OPEC’s decision to extend its plan to cut production, trim the global support and stabilize prices. With prices rising, I can’t see any reason why OPEC and Russia won’t go along with extending the program since it seems to be working.

Technical Analysis

(Click to enlarge)

The main trend is up according to the weekly swing chart. A trade through the previous top at $50.62 changed the main trend to up this week. This was the first time this year that a rally was strong enough to cross to the strong side of a swing top. This is a potentially bullish development on the weekly chart.

While the daily chart shows many price swings, the weekly chart is less-noisy and the moves tend to be true. Given the subtle change in the fundamentals, I believe the change in trend to up to be an actual reflection of how investors feel about the market at this time.

In other words, I think there is real buying in the market and not just sloppy buyers looking to run buy stops. Of course, I’d like to see a surge in buying volume when the market follows through to the upside to give me confidence in my forecast.

My forecast will be wrong if sellers take out $46.14.

The main range is $58.37 to $42.80. Its retracement zone is $50.59 to $52.42. This zone is very important to the longer-term structure of the market. At this time, it is acting like resistance. Overcoming this zone will put the crude oil market in a very strong position to continue the rally.

The key level to watch from now until the end of the year is $50.59. This price is 50% of the 2017 range. Straddling this price will indicate the crude oil market is balanced or nearly-balanced.

A sustained move over $50.59 will indicate the buying is getting stronger. A sustained move under $50.59 will signal the presence of sellers. However, if the fundamentals continue to improve, the sellers won’t be able to gain control unless $46.14 fails as support.





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