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Reversing The Trend: Oil Falls Below $60

U.S. West Texas Intermediate and international benchmark Brent crude oil futures are in a position on Friday to post their biggest weekly loss of the year. Most of the loss can be attributed to a steep decline on Thursday, which produced the worst single-day performance in 2019.

Traders are saying that the sell-off is being fed by concerns over rising U.S. stockpiles and worries that the U.S.-China trade standoff has finally hit the U.S. economy.

Rising U.S. Stockpiles One Bearish Factor

Surging U.S. inventories weighed heavily on U.S. West Texas Intermediate and international benchmark Brent crude oil futures throughout the week.

A jump in U.S. crude inventories primarily caused by low refinery runs helped drive prices lower. According to the Energy Information Administration (EIA) weekly inventories report, U.S. crude stockpiles soared to their highest levels since July 2017.

The EIA data showed commercial U.S. crude inventories rose by 4.7 million barrels in the week ended May 17, to 476.8 million barrels. The government also reported that U.S. crude oil production climbed by 100,000 barrels per day (bpd) to 12.2 million bpd. Last month, production hit a record 12.3 million bpd.

Weak refinery demand and the planned sale of U.S. strategic petroleum reserves (SPR) into the commercial market have also set up crude for its worst weekly performance in 6 months.

Ongoing Trade War Raising Fears about Weak Economic Growth

According to a report released on Thursday, the latest aggressive actions against China are preventing trade negotiations with Beijing from proceeding, China’s Commerce Ministry said.

“If the U.S. would like to keep on negotiating it should, with sincerity, adjust its wrong actions. Only then can talks continue,” Ministry of Commerce spokesperson Gao Feng said Thursday in Mandarin, according to a CNBC translation.

“The U.S. … crackdown on Chinese companies not only seriously damages the normal commercial cooperation between both countries, but it also forms a great threat to the security of the global industrial and supply chain,” Gao said. “China is firmly opposed to this. We will closely monitor developments and make adequate preparations.”

There is now evidence that the impact of the U.S.-China trade dispute is affecting the U.S. economy. This came to the surface on Thursday with the release of the weaker-than-expected Flash U.S. Manufacturing and Services PMI data. This raised concerns over lower future demand on top of steadily rising U.S. stockpiles and production.

Additionally, the supply glut has spread outside of the U.S. and is now affecting other countries. According to reports, Asian refinery margins this week fell to their lowest seasonal levels since at least the financial crisis a decade ago, triggering plans for refinery run cuts.

OPEC-led Supply Cuts Still Supportive

The OPEC-led supply cuts have been the primary driver of this year’s rally. So the possible extension of the production curbs could be the catalyst that triggers a resumption of the move. However, since the coalition is not scheduled to meet until the end of June, WTI and Brent prices could flounder for another month.

At the start of the week a rally was fueled by comments from Saudi Energy Minister Khalid al-Falih after he said on Sunday there was a consensus among OPEC and other non-OPEC producers to drive down crude inventories “gently”, but his country would remain responsive to the needs of what he called a fragile market.

“This second half, our preference is to maintain production management to keep inventories on their way declining gradually, softly but certainly declining towards normal levels,” he told a news conference after a ministerial panel meeting.

Russian Energy Minister Alexander Novak on Sunday said there were different options available for OPEC and its oil-producing allies in the second half of 2019, including a possible raising of output.

“As far as our joint plan of action for the second half of the year. We are supportive of continuing our cooperation with our colleagues from other countries,” Novak told CNBC.

“But this continuation could depend to various extents on how the situation unfolds by this time and what forecasts for supply and demand will be on the market. If it turns out there will be a shortfall in the market then we will be prepared to examine options linked with a possible increase in production,” he said Sunday.

Technical Analysis

July Weekly Technical Analysis

WTI

(Click to enlarge)

The main trend is down according to the weekly swing chart. The trend turned down when sellers took out the previous swing bottom at $60.10. If the selling pressure continues then look for buyers to go after the next swing bottom at $55.80. Taking out this level will reaffirm the downtrend.

The main trend will change to up on a trade through $63.96. This is followed by the next swing top at $66.44.

The main range is $75.20 to $44.20. Its retracement zone at $59.70 to $63.36 is controlling the longer-term direction of the market. Trading below this zone will contribute to the downside bias.

The short-term range is $44.20 to $66.44. If the downside momentum continues then look for the selling to extend into its 50% to 61.8% retracement zone at $55.32 to $52.70. This zone represents value so we’re expecting buyers to return on a test of this zone. This could stabilize the market at least temporarily.

Weekly Forecast

The direction of the July WTI crude oil market this week is likely to be determined by trader reaction to the downtrending Gann angle at $58.20.

Bearish Scenario

A sustained move under $58.20 will indicate the presence of sellers. If the move creates enough downside momentum then look for the move to possibly continue into the main bottom at $55.80, followed by the 50% level at $55.32. This is followed closely by an uptrending Gann angle at $55.20.

Watch for counter-trend buyers on the first test of $55.32 to $55.20. If this area fails then look for the selling to extend into $52.70.

Bullish Scenario

Crossing to the strong side of the downtrending Gann angle at $58.20 will signal the return of buyers. The next target is $59.70. Overcoming this level will indicate the buying is getting stronger. Holding between $59.70 and $63.36 will indicate trader indecision.



Leave a comment
  • Musa on May 25 2019 said:
    Great analysis
  • Tripp Mills on May 31 2019 said:
    P.S.S. March seemed to be a problematic month for my friendly neighborhood discount brokerage - they seemed to busy explaining how they can or can't short short short positions I hold yet they could not pay cash dividends and did illegal share buys (no they are not authorized to act on my behalf ever - check triggers and make sure your shares are not being illegally shorted investors by the worst of the worst discount brokerages).
  • Tripp Mills on May 31 2019 said:
    Everyone have a great day and (yes they have figured out they can short short short oil likely with our money and our expense - nice discount/free brokerage system we have, right? Ask them to let you pay and hell no - why do that when they can just steal trillions from the American investor/public!
  • Tripp Mills on May 31 2019 said:
    Question also (aside from everyone I hope you all have a nice day) - what does FINRA do? I happened to call them in DC and they were just plain rude - I made a request to speak to a FINRA rep for my brokerage and they said NO, I said can you pass that along and they said NO - rude rude rude. That's who is overseeing the brokerage industry? Really? Lets hope to see others besides the big banks and wall street sitting under the heat in congress - they have likely deserved it for a long time!

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