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The Billion Dollar Oil Hedge That May Never Happen

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Only Change In Fundamentals Can Trigger Oil Breakout

U.S. West Texas Intermediate crude oil futures are edging higher for the week, while posting a relatively tight trading range following the previous week’s steep sell-off. The inside trading range suggests investor indecision and impending volatility. The rangebound trade is being capped by worries over global demand and underpinned by tensions in the Middle East.

Actually there is more to the limited gains than the forecasts for lower demand. There are also worries about rising U.S. shale production. However, this week’s U.S. government inventories report was bullish. Furthermore, the market is also being supported by the OPEC-led supply cuts and U.S. sanctions against Venezuela and Iran. Although these factors may eventually be offset by climbing U.S. production.

Middle East Tensions

According to the latest reports, tensions remain high around the Strait of Hormuz because Iran is refusing to release the British flagged oil tanker it commandeered last week in the Gulf.

In the meantime, U.S. Secretary of State Mike Pompeo said Washington had asked Japan, France, Germany, South Korea, Australia and other nations to join maritime security efforts.

Weakening Global Economy

Recently, OPEC and the International Energy Agency warned of lower future demand. On Friday, a Reuters poll taken July 1-24 showed the growth outlook for nearly 90% of the more than 45 economies surveyed was downgraded or left unchanged. That applied not just to this year but also 2020.

U.S. Energy Information Administration Weekly Inventories Report

According to the EIA, U.S. crude oil inventories declined 10.8 million barrels in the week ending July 19. Traders were expecting the EIA to report an inventory draw of 4.2 million barrels.

Gasoline inventories fell by 200,000 barrels last week, following the prior week’s 3.6 million barrel increase. Gasoline production, the EIA said, averaged 10.1 million bpd last week, up from 9.9 million bpd a week earlier.

Distillate fuel inventory increased 600,000 barrels. During the week-ending July 12, distillate fuel inventories jumped 5.7 million barrels. Production last week averaged 5.2 million barrels per day, versus 5.4 million bpd a week earlier.

Additionally, refineries processed 17 million bpd in the seven days to July 19, down from 17.3 million bpd processed on average in the previous week.

Economic Data Controlling Price Action

Although speculative traders continue to buy futures and options contracts in case there is a supply disruption in the Middle East, traders don’t really believe a military conflict is imminent.

We essentially have a tug of war in the market which is contributing to the rangebound trade. This condition is expected to continue until the economic data worsens or improves.

On Wednesday, purchasing manager index data from the U.S. and Europe confirmed the concerns over slowing growth amid the trade war between the United States and China. However, Friday’s better-than-expected U.S. Advance GDP seems to have softened these concerns.

Central bank officials will try to slow down the weakness in the global economy by cutting rates. However, these moves aren’t expected to have an immediate effect on crude oil demand.

The United States and China are scheduled to resume trade talks on Monday, but the two economic powerhouses may not even be close to a settlement. Crude oil traders showed limited reaction to this news, perhaps signaling a lack of confidence in the process.

The tension in the Middle East is likely to linger, but unless there is a major conflict that leads to a supply disruption, prices are not likely to move much.

Technical Analysis

Weekly September West Texas Intermediate Crude Oil Technical Analysis

WTI

The main trend is down according to the weekly swing chart. This week’s inside range indicates investor indecision and impending volatility.

A trade through $50.91 will signal a resumption of the downtrend after seven weeks of counter-trend trading. The main trend will change to up on a trade through $64.20.

The minor trend is also down. This trend indicator is controlling the momentum. A trade through $61.02 will change the minor trend to up. This will also shift momentum to the upside.

The main range is $74.44 to $44.66. Its retracement zone at $59.55 to $63.06 is resistance. This zone stopped the last rally at $61.02 the week-ending July 12.

The minor range is $44.66 to $65.92. Its retracement zone at $55.29 to $52.78 is potential support. The upper or 50% level of this range at $55.29 stopped the selling last week and the week before.

Weekly Forecast

Based on last week’s price action and the price action the week-ending July 19, the direction of the September WTI crude oil market next week is likely to be determined by trader reaction to the minor 50% level at $55.29.

Bullish Scenario

A sustained move over $55.29 will indicate the presence of buyers. If they can create enough upside momentum then look for a drive into the main 50% level at $59.55.

Overcoming $59.55 will indicate the buying is getting stronger. This could lead to a test of $61.02. This is a potential trigger point for an acceleration into $63.06.

Bearish Scenario

A sustained move under $55.29 will signal the presence of sellers. This could trigger a spike into $52.78. If this level fails to hold then look for the selling to possibly extend into the main bottom at $50.91.

Taking out $50.91 will signal a resumption of the downtrend. This could also trigger an acceleration to the downside. The weekly chart indicates there is plenty of room to the downside with the next major target the main bottom from the week-ending December 28, 2018 at $44.66.

Overview

The price action suggests that something has to give on the fundamental side to trigger a breakout of the six-week range.

Pulling the plug on the tensions in the Middle East and further signs of a weakening global economy could trigger a plunge in the market. Rising U.S. stockpiles and production could help accelerate the move.

Bullish traders will be helped by an actual supply disruption in the Middle East, further drawdowns in U.S. stockpiles and major progress in the U.S.-China trade talks.


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