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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Oversupply Concerns Plague Crude Markets

Oil

September West Texas Intermediate crude oil futures are in a position to close lower for the week despite clawing back most of its weekly loss since Wednesday. The price action suggests investors are trying to find a point on the chart to balance concerns about oversupply and lower demand with the possibility of reduced exports from the Middle East and dwindling spare capacity.

The week started with a steady opening tied to worries over strikes in Norway and Iraq disrupting supply, but sellers quickly took care of that by driving prices sharply lower on the news that Libya had restarted output from a major oil field.

Prices were further pressured by reports that centered on a possible sale of U.S. oil reserves. Currently, the United States holds a reserve of about 660 million barrels, and the Trump administration was considering drawing on the country’s oil reserve, according to a Bloomberg report. This move would definitely increase supply and weigh on prices.

After trading down to its lowest level since June 22, WTI crude oil was able to stabilize for two days before reaching its low for the week on Wednesday.

Helping to limit losses at mid-week was a strong short-covering rally, fueled by a reaction to a U.S. government inventories report.

The Fundamentals

On Wednesday, the U.S. Energy Information Administration (EIA) reported that crude oil inventories increased 5.8 million barrels in the week-ending July 13, compared with analysts’ expectations for a decrease of 3.6 million barrels.

U.S. crude oil production last week hit 11 million barrels per day (bpd) for the first time in the nation’s history, the EIA said. Net U.S. crude imports rose last week to 2.2 million bpd to about 9 million bpd.

Gasoline stocks fell by 3.2 million barrels, compared to analysts’ expectations for a drop of 44,000 barrels. Distillate stockpiles, which include diesel and heating oil, fell by 371,000 barrels, versus expectations for an 873,000-barrel increase, the EIA data showed.

Wednesday’s rally was fueled by the bigger-than-expected drop in gasoline futures. However, gains were likely limited by the larger-than-expected build in crude inventories and more importantly, the jump in U.S. production to a record 11 million bpd.

Rally May Be Limited

The limited price action the rest of the week indicates that traders are struggling with signs of strong gasoline demand in the United States at a time when oil producers are putting more crude on the market. This likely means that the bullish move sparked by the gasoline data is unlikely to last.

Furthermore, President Trump is targeting high gasoline prices and is trying hard to get them lowered. Russia and Saudi Arabia are helping Trump’s cause by increasing their supply so it will be a challenge for bullish traders to overcome resistance on the basis of increased gasoline demand.

Technical Analysis

(Click to enlarge)

The main trend is up according to the weekly swing chart. A trade through $72.98 will signal a resumption of the uptrend. A move through $62.99 will change the main trend to down.

The main range is $62.99 to $72.98. Its 50% to 61.8% retracement zone is $67.99 to $66.81. This zone was tested earlier in the week and it looks as if buyers are trying to establish support at this area.

The short-term range is $72.98 to $66.29. Its retracement zone at $69.64 to $70.42 is the upside target.

All of this week’s price action took place inside a major retracement zone bordered by $64.93 to $70.70.

The key to the market next week will be trader reaction to the 50% level at $69.64 and the pair of 61.8% levels at $70.42 to $70.70.

Aggressive counter-trend sellers are likely to come in on a test of $69.64 to $70.70. They are going to try to form a potentially bearish secondary lower top. If successful then we should see a retest of $66.29 over the near-term. If this price fails as support then look for the selling to extend into $64.93, followed by $63.92 and $62.99.

Forecast

Although momentum shifted a little to the upside the last couple of daily trading sessions, WTI crude oil remains in a position to finish lower for a third straight week.

The main concerns for investors are oversupply and lower demand due to a possible economic slowdown caused by the trade conflict between the United States and China, a pair of the world’s two biggest crude oil users.

Oversupply has been a concern since some production returned after outages. This is on top of increased production from Saudi Arabia, Russia and the United States, which set a record last month with 11 million barrels per day production.

Trade tensions between the U.S. and China have stoked fears of damage to their economies and commodities demand. China’s currency is falling as the People’s Bank of China pushes its currency lower. This making traders nervous because it suggests not only a trade war, but a currency war may be brewing.

Lower crude oil demand in the U.S. and China caused by an economic slowdown from their trade war would have a tremendous impact on the crude oil market.

Look for sellers to return on a move into $69.64 to $70.70. There is a bearish bias in the market, but traders want to get a good price to short. This zone is the best resistance area.




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