Oil Markets Set For A Major Move To The Downside

The major theme this week has been the potential for rising supply to overwhelm the expected gains in crude demand for 2018. This notion was supported on Thursday by a report from the International Energy Agency (IEA) which said global oil supply increased in February by 700,000 barrels per day (bpd) from a year ago to 97.9 million barrels per day.

The IEA also said supply from producers outside of OPEC, led by the U.S., will grow by 1.8 million bpd this year versus an increase of 760,000 bpd last year. This supply increase is more than the IEA's expected demand growth forecast for this year of 1.5 million bpd.

Furthermore, the IEA said that commercial oil inventories in industrialized nations rose in January for the first time in seven months. Although this hardly suggests the trend is turning in favor of rising inventories, it does seem to indicate the downslide momentum generated by OPEC and Russia to cut supply may be coming to an end.

Weekly May West Texas Intermediate Crude Oil Technical Analysis

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The main trend is up according to the weekly swing chart, however, momentum has trended sideways to lower since the week-ending January 26.

A trade through $66.02 will signal a resumption of the uptrend. A move through $57.60 will indicate the selling is getting stronger. A move through $55.90 will change the main trend to down.

The main range is $47.50 to $66.02. Its 50% to 61.8% retracement zone at $56.76 to $54.57 is the primary downside target. A test of this zone over the near-term is likely to attract new buyers because it represents value.

The short-term range is $55.90 to $66.02. Its 50% level or pivot is $61.81. It is controlling the short-term direction of the market. Crude oil has straddled this level the last four weeks. Trader reaction to this level should determine the direction of the market next week.

A sustained move under $61.47 will signal the presence of buyers. A sustained move over this price will indicate the return of buyers.

The major Gann angle dictating the direction of the market is at $63.00 next week. It is moving up at a rate of $0.50 per week. Currently, the market is trading below this angle. This is a sign of weakness and that sellers are in control of the trade.

In order to turn bullish again, buyers are going to have to recapture the 50% level at $61.81 and the uptrending angle at $63.00. A sustained move over the Gann angle will indicate that the buying is getting stronger.

Daily May West Texas Intermediate Crude Oil Technical Analysis

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Adding to expectations of increased volatility is the daily chart pattern. Currently, May WTI crude oil is trading inside a major triangle chart pattern. This is compressing prices which means we should expect a volatile breakout when the support and resistance angles are taken out with rising volume.

Next week, the resistance will range from $61.88 on Monday to $61.38 on Friday. Breaking through these levels in a timely manner will indicate the buying is getting stronger. This should trigger an acceleration to the upside if volume increases on the move.

The support will range from $60.73 to $61.23. Taking out this angle with conviction will signal the selling is getting stronger. This could trigger a spike to the downside.

Daily/Weekly Chart Combination Forecast

Looking at a combination of the weekly/daily chart, we're going to be bearish on a sustained move under $61.81 with selling pressure expected to increase if $61.38 is taken out by the end of the week.

Overtaking $61.81 will not turn us bullish, but it will indicate the selling pressure is weakening and that perhaps the buying is getting stronger. We'll turn bullish if buyers can overcome $63.00 with strong volume.

Summary

Both the daily and weekly chart patterns indicate that a slight bias is developing to the downside. However, it also indicates impending volatility. This likely means that we are going to see a major move to the downside within the next 5 to 7 days. The longer the markets stay inside the triangle and under the retracement zones, the bigger the expected break. This will likely be triggered by aggressive hedge fund liquidation.

As long as the supply/demand fundamentals narrative remains essentially the same, the difference maker in the market will be hedge fund activity. Recently, we've seen signs that the crude oil rally may be over. According to the Commodity Futures Trading Commission, money managers cut their combined net long positions in the six most important futures and options contracts linked to petroleum prices by 50 million barrels in the week to March 6.

If the markets remain rangebound then the hedge funds may start to move money out of crude oil and into more active markets. This selling would drive prices sharply lower. Additionally, any prolonged weakness in the stock market will also weigh on crude oil prices.