Oil Rallies On Profit Taking, But Can It Hold Onto Gains?

August West Texas Intermediate Crude Oil Futures

August West Texas Intermediate crude oil futures are set up for a solid close this week. A combination of profit-taking and short-covering has been behind the lengthy rally.

August WTI Crude oil futures are in a position to post their biggest weekly gain since mid-May, ending five weeks of losses with prices underpinned by a decline in U.S. output.

U.S. crude futures are currently up about 4.6 percent for the week. That marks the biggest rise since the week-ending May 19.

The market received a boost on Wednesday after the U.S. government reported a decline in weekly U.S. production. The news carried over into Thursday's session. This news helped alleviate a few of the lingering concerns over the global supply glut.

A weaker U.S. Dollar also helped boost dollar-denominated crude because of increased foreign demand, however, the primary driver of the bullish price action was the Energy Information Administration's report from Wednesday that showed domestic crude production dropped by 100,000 barrels per day (bpd) to 9.3 million bpd the week-ending June 23, the steepest weekly fall since July 2016.

August West Texas Intermediate Crude Oil Technical Analysis

(Click to enlarge)

The main trend is down according to the weekly swing chart. A trade through $42.05 will signal a resumption of the downtrend. This should lead to an almost immediate test of the April 5, 2016 bottom at $41.98. This price is the trigger point for a steep sell-off with the January 20, 2016 main bottom at $36.80 the next likely target. So you can see why buyers came in late last week. They wanted to prevent a complete washout to the downside.

This week's rally was strong enough to take out the previous week's high which turned the low at $42.05 into a new minor bottom.

The new range is $52.22 to $42.05. Its 50% to 61.8% retracement zone at $47.14 to $48.34 is the primary upside target. Since the main trend is down, sellers are likely to come in to defend the trend on a test of this zone. Before the market can reach this zone, it will have to overcome a downtrending angle at $46.22 next week.

Given the bearish fundamentals, a test of the retracement zone represents the best area to initiate new short positions.

The market will return to a weak position under $41.98. The first target angle comes in at $40.22. Crossing to the weak side of this angle will indicate the selling pressure is getting stronger.

August West Texas Intermediate Crude Oil Forecast

Investors know that crude oil hit a 10-month low last week in the face of a mounting supply glut. They also know that a firm North Sea crude oil market is starting to show signs of long-lost strength.

Both moves suggest that some of the pessimism that has driven down oil futures this month and created record short positions against a prolonged rally may be unjustified. This being said, bearish short sellers have been reluctant to refresh positions at current price levels.

Bullish traders may not be too excited about taking aggressive long positions yet, but this week's price action suggests that weaker shorts are a little uncomfortable and are willing to book profits.

This week's price action suggests the direction of the market next week will be determined by the weekly rig count. Bullish traders are hoping that the reported decline in U.S. output means producers reduced the number of oil rigs this week.

A lower rig count may be the catalyst needed to drive the market into $47.14 to $48.34.

August Natural Gas Futures

Natural gas futures rose to a four-week high last Thursday after government data showed that domestic supplies rose less than forecast last week. However, concerns over future demand due to the weather, helped trigger a late session sell-off.

Thursday's weak close is encouraging further selling pressure early Friday. At 0600 GMT, the August Natural Gas futures contract is trading $3.029, down 0.013 or -0.43%.

According to the U.S. Energy Information Administration, natural gas in storage in the U.S. rose by 46 billion cubic feet in the week-ending June 23. Traders were estimating a 52 Bcf build.

That build compared with a gain of 61 billion cubic feet in the preceding week, an increase of 37 billion a year ago and a five-year average rise of 72 billion cubic feet.

The EIA also said that total natural gas in storage currently stands at 2.816 trillion cubic feet. That is 10.2% lower than levels at this time a year ago but 6.4% above the five-year average for this time of year.

August Natural Gas Technical Analysis

(Click to enlarge)

The main trend is down according to the weekly swing chart. This week's price action strongly indicates that $3.127 is still solid resistance. Although the trend won't change to up on a move through this price, it looks like it's the trigger point for an acceleration into the retracement zone at $3.202 to $3.280.

The new short-term range is $2.875 to $3.122. Its retracement zone is $2.996 to $2.966. Trader reaction to a test of this zone will determine whether the market moves higher or lower this week.

A sustained move over $2.996 will indicate the presence of buyers. A sustained move under $2.966 will tell us that sellers are still in control.

Forecast

The price action suggests that investors may have fully priced in expectations of higher demand next week due favorable weather conditions.

If buyers come in on a test of the value zone at $2.999 to $2.969 then natural gas may make another run at breaking out over a key top at $3.127. This could generate the momentum needed to trigger a rally into at least $3.202.

If sellers retake control then look for a steep break under $2.969. This will indicate that investors will be going after $2.875. It will also make $3.127 and $3.122 an important double-top.

With traders seemingly accepting the current weather forecast, it is going to take a new forecast calling for extreme heat to encourage additional speculative buying, otherwise, we could return to a rangebound trade.