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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Oil Prices Supported By Shrinking Inventories

Cushing

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures traded in a sideways-to-lower range early in the week, but momentum shifted on Thursday, driving prices to their highest levels in two weeks.

The movement in the U.S. Dollar had the most impact on the markets, but there was enough meat on the bones of the government’s weekly inventories report to generate some upside volatility.

A rising U.S. Dollar put pressure on demand for dollar-denominated crude at times. The dollar was supported by the minutes of the Federal Reserve’s January monetary policy meeting which showed policymakers are confident in the need to keep raising interest rates throughout the year.

In other news, the American Petroleum Institute (API) said late Wednesday that U.S. crude oil inventories unexpectedly dropped by 907,000 barrels to 420.3 million barrels for the week to February 16. Analysts had expected a small build of 1.333 million barrels in crude oil inventories.

The API added that gasoline inventories posted a build of 1.468 million barrels, slightly higher than the 1.229-million-barrel forecast. Distillate inventories saw a fairly large draw of 3.563 million barrels. Analysts had forecast a smaller decline of 1.633-million-barrels.

Prices were boosted on Thursday by data showing a surprise draw in U.S. crude inventories. According to data from the Energy Information Administration, U.S. crude inventories unexpectedly fell 1.6 million barrels last week as net imports dropped to a record low and exports surged, while inventories at the key futures hub in Cushing, Oklahoma continued to slide.

Crude inventories had been forecast to rise 1.8 million barrels, as stocks seasonally rise when refineries cut intake to conduct maintenance.

U.S. net crude imports fell 1.6 million barrels per day to just below 5 million bpd the week-ending February 16, the lowest level since the EIA started recording the data in 2001.

Exports of U.S. crude jumped to just above 2 million bpd, close to a record 2.1 million hit in October. That helped push net imports to the lowest level on record.

Weekly Technical Analysis

The main trend is up according to the weekly swing chart. A trade through $66.39 will signal a resumption of the uptrend.

A move through $57.90 will indicate the selling is getting stronger and momentum is to the downside.

The main range is $47.41 to $66.39. Its 50% to 61.8% retracement zone is $56.90 to $54.66.

The intermediate range is $50.19 to $66.39. Its retracement zone is $58.29 to $56.38.

Two weeks ago WTI crude oil found support inside a pair of 50% levels at $58.29 to $56.90. The low was $57.90.

The short-term range is $66.39 to $57.90. Its retracement zone at $62.15 to $63.15 is currently being tested. Trader reaction to this zone will determine the near-term direction of the market.

Aggressive counter-trend sellers are going to try to stop the rally at $62.15 to $63.15. They are going to try to form a secondary lower top. This is usually the first sign that the selling is greater than the buying. It also often leads to the start of an eventual change in trend.

Trend traders are going to try to drive the market through $63.15. This will indicate the presence of buyers. They are going to try to drive the market into the main top at $66.39. This price action will also solidify the importance of the $57.90 bottom.

Weekly Forecast

(Click to enlarge)

The big debate amongst traders is whether rising U.S. production will continue to offset the progress made by the OPEC-led production cuts. This seems to be neutralizing the market. The wildcard, or primary market driver at this time is the U.S. Dollar.

A weaker U.S. Dollar is likely to underpin crude oil prices. If the dollar tests another four-year low next week then oil prices could spike to the upside.

A stronger U.S. Dollar is likely to limit gains in the crude oil market. If the dollar continues to rally on the back of rising interest rates then crude oil could move sideways-to-lower over the near-term. Prices could accelerate to the downside if the dollar spikes higher.

Based on the price action late in the week, look for a bullish tone next week if WTI can sustain a rally over $63.15. Look for a bearish tone to develop on a sustained move under $62.15.




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