Rally Unwinds As Russia, Saudis Aim To Increase Oil Output

U.S. West Texas Intermediate crude and internationally-favored Brent crude oil are trading sharply lower on Friday, putting the market in a position to finish the week lower for the first time since the week-ending April 27. The market is being pressured by the possibility of increased production from OPEC for the first time since 2016. This news is offsetting potentially bullish supply disruptions from both Venezuela and Iran.

Also worrying bullish crude oil traders was a sustained rise in gasoline inventories just ahead of the Memorial Day holiday in the United States, which typically marks the start of the summer driving season.

Russia Factor

Crude oil sellers are reacting to the news that Russia hinted it may gradually increase output after withholding supplies since 2017 together with producer cartel OPEC.

Russia has been floating the idea of ending the production for several weeks, with energy minister Alexander Novak saying on Thursday that restrictions on oil production could be eased "softly" if OPEC and non-OPEC countries see the oil market balancing in June.

Surprise Build in U.S. Inventories

An unexpected build in U.S. crude oil inventories also weighed on prices, driving the spread between Brent crude and U.S. West Texas Intermediate (WTI) close to its widest in three years.

On Wednesday, the U.S. Energy Information Administration (EIA) said commercial crude inventories rose by 5.8 million barrels in the week to May 18. This surprised traders who were looking for a draw of 1.6 million barrels.

Additionally, U.S. crude oil exports dropped by more than 800.000 barrels a day last week to about 1.75 million barrels a day. Meanwhile, crude imports were up by 558,000 barrels and refiners produced less distillate fuel, which includes diesel and heating oil.

Gasoline stockpile levels also surprised the market by jumping 1.9 million barrels a day, while distillate inventories fell slightly less than expected.

Hedge Fund Activity Indicator

One key indicator that is impacting the price action is hedge fund and commodity fund activity. According to government trading data, they have cut their holdings of crude futures and options by more than 10 percent in the last seven weeks to the lowest level this year. The markets are not likely to rally much from current price levels until the professional money managers start buying again.

July West Texas Intermediate Crude Oil Technical Analysis

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The main trend is up according to the weekly swing chart, however, the higher-high, lower-close chart pattern has put the market in a position to form a potentially bearish closing price reversal top. This chart pattern doesn't indicate a change in trend, but it often indicates that the selling is greater than the buying at current price levels. This is likely to lead to a 2 to 3 week correction and possibly a 50% correction of the last rally.

The short-term range is $55.45 to $72.90. If the closing price reversal top chart pattern is confirmed next week then look for the start of a possible correction into the 50% to 61.8% zone at $63.77 to $61.81.

This week's weakness has also put the market inside the contract's 50% to 61.8% zone at $64.77 to $70.60. This makes $70.60 new resistance and $64.77 a new downside target.

Combing the short-term retracement zone and the contract retracement zone creates a potential support cluster at $64.77 to $63.77. This area is my primary downside target.

Weekly Forecast
Based on this week's price action, the direction of the Weekly July WTI crude oil contract over the near-term will be determined by trader reaction to the long-term uptrending Gann angle at $68.98 this week and $69.48 the week-ending June 1.

A close under $69.98 the week-ending May 25 will put the market in a weak position even before the start of next week's trading. The inability to overcome $69.48 next week will also be a sign of weakness. This could trigger the start of a prolonged sell-off with $64.77 to $63.77 the next likely downside target.

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The main trend is up on the monthly chart, but the market is coming dangerously close to forming a potentially bearish monthly closing price reversal top.

A close below $68.48 on May 31 will form a closing price reversal top. This will be a very serious development because a reversal on a monthly chart often triggers the start of a 2 to 3 month correction.

A pair of Gann angles come in on the monthly chart at $66.98 and $66.51. Crossing to the weak side of these angles will indicate the selling pressure is increasing. This could trigger a move into the major 50% level at $64.77.

Crude oil has formed a closing price reversal top on the daily chart and is in a position to form one on the weekly chart. A close below $68.48 on May 31 will form a reversal on the monthly chart. This rare triple closing price chart pattern will be a strong sign that a major top has formed.