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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Oil Markets Walk A Tightrope

Rig

U.S. West Texas Intermediate crude oil futures are trading higher on Friday. The market is also in a position to post a higher close on the weekly chart, something it has done only once since the week-ending June 29.

Worries that the sanctions on Iran will cut significant volumes of crude from the market are underpinning the market today. Some traders, however, are saying gains are being limited by concerns over future demand due to the trade dispute between Washington and Beijing.

Traders are also reacting to the tight supply/demand situation which makes the market vulnerable to any supply disruption. Traders are particularly concerned about the supply side of the equation because of the looming U.S. sanctions against Iran, which will target oil exports from November.

According to early estimates, the sanctions are expected to strip about 2.5 million barrels per day (bpd) of crude and condensate this year from the market, or about 2.5 percent of global consumption. Analysts also note that Iran is already experiencing a slowdown with tanker loadings already down by around 700,000 bpd in the first half of August relative to July. This is currently ahead of expectations.

Analysts are also saying that during the fourth quarter of 2018, the market will be facing an issue with either undersupply, dwindling spare capacity or both.

While the bullish headlines are driving the price action this week, some traders are still expressing caution due to concerns over Chinese demand and the impact of the US – China trade dispute. The low-level trade talks ended on Thursday with nothing major accomplished. Instead, both countries activated another round of dueling tariffs on $16 billion worth of each other’s goods.

Nonetheless, sources told Reuters on Thursday that China’s Unipec will resume purchases of U.S. crude oil in October after a two-month halt due to the trade dispute. This surprise news puts further emphasis on the supply side of the equation.

This week, bullish traders have more than recovered last week’s steep sell-off that was fueled by demand concerns and a stronger U.S. Dollar. It seems weak long investors may have panicked last week during the height of the financial crisis in Turkey. Once concerns dampened on August 16, buyers regained control, buying with confidence for seven consecutive sessions on the daily chart since hitting its lowest level since June 21 at $63.89.

The Fundamentals

On Wednesday, the U.S. Energy Information Administration (EIA) announced that U.S. commercial crude oil inventories fell by 5.8 million barrels in the week to August 17 to 408.36 million barrels. Additionally, the EIA said that U.S. crude oil output rose back to 11 million barrels per day, but this had little effect on the bullish response to the inventories data.

Technical Analysis

(Click to enlarge)

The main trend is up according to the weekly swing chart. A trade through $62.60 will change the main trend to down. A move through $71.63 will signal a resumption of the uptrend.

The main range is $71.63 to $62.60. The 50% level or mid-point of this range is $67.12. This level is controlling the direction and the momentum of the crude oil market.

Momentum shifted to the upside this week when buyers overcome the pivot with conviction. Closing above $67.12 will indicate a strong upside bias.

Late Friday, the market is testing a downtrending Gann angle at $68.38. Breaking out over this angle will indicate the buying is getting stronger since this angle has acted like resistance for 13 weeks. Next week, the angle drops down to $68.13. Holding above this angle will also signal a strong upside bias.

Next week will be all about momentum. Taking out the minor top at $69.19 will be the first sign that momentum is getting stronger. This could trigger a further rally into the next downtrending Gann angle at $69.88. This is followed by another downtrending Gann angle at $70.76. This angle is the last potential resistance before the $71.29 and $71.63 main tops.

A failure to hold above $68.13 will be the first sign of weakness. This could lead to a retest of the pivot at $67.12. If the pivot fails to hold then look out to the downside since the next major support doesn’t come in until $63.89 to $62.60.

Conclusion

Look for the market to strengthen as long as it holds above $67.12. This is the balance point on the chart. Trading above it means buyers are worried about a supply shortage. Trading below it will mean sellers are concerned about low demand. The current price at $68.53 tells us that supply is the issue and this is being confirmed by the headlines.




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