U.S. West Texas Intermediate and international-benchmark Brent crude oil are on pace to post another weekly gain although Brent is looking a little shaky on the daily chart.
WTI crude oil is heading for a fourth straight weekly gain and could close as much as 9 percent higher on the monthly chart. Brent is also up about 9 percent for September and is also in a position to post its fifth consecutively weekly gain. Brent may also post its strongest third quarter in 13 years.
Although both contracts surged earlier in the week, prices were limited by resistance and generally overbought technical levels. Prices continued to be supported by expectations of greater demand due to forecasts from OPEC and the International Energy Administration.
Additionally, buyers are even more optimistic that higher prices will encourage OPEC and other major non-OPEC producers to extend their current production cuts to perhaps the end of 2018.
Hedge fund buying is also driving up prices. Current data supports the notion that the hedge funds have been fairly aggressive lately. According to the U.S. Commodity Futures Trading Commission, hedge funds raised their bullish bets on U.S. crude oil futures to the highest level in four weeks. Additionally, they also reduced short positions for a third straight week through September 19.
This week's price action suggests that the argument for a bear market is being blown up by the aggressive buying. While there has been a wave of…
U.S. West Texas Intermediate and international-benchmark Brent crude oil are on pace to post another weekly gain although Brent is looking a little shaky on the daily chart.
WTI crude oil is heading for a fourth straight weekly gain and could close as much as 9 percent higher on the monthly chart. Brent is also up about 9 percent for September and is also in a position to post its fifth consecutively weekly gain. Brent may also post its strongest third quarter in 13 years.
Although both contracts surged earlier in the week, prices were limited by resistance and generally overbought technical levels. Prices continued to be supported by expectations of greater demand due to forecasts from OPEC and the International Energy Administration.
Additionally, buyers are even more optimistic that higher prices will encourage OPEC and other major non-OPEC producers to extend their current production cuts to perhaps the end of 2018.
Hedge fund buying is also driving up prices. Current data supports the notion that the hedge funds have been fairly aggressive lately. According to the U.S. Commodity Futures Trading Commission, hedge funds raised their bullish bets on U.S. crude oil futures to the highest level in four weeks. Additionally, they also reduced short positions for a third straight week through September 19.
This week's price action suggests that the argument for a bear market is being blown up by the aggressive buying. While there has been a wave of aggressive buying lately by new longs, there has also been a tremendous rush of short-covering.
Caught on the wrong side of the rally are bearish traders who believed U.S. drillers would just ramp up production once prices rose over $50.00, but that is not likely to be the case. Remember that several months ago, drillers announced cutbacks in capital spending. Additionally, the number of oil rigs operating in U.S. fields has plateaued recently. Therefore, it is possible that U.S. production may even drop in the next few months, adding further fuel to the rally.
Despite the bullish conditions, investors still had respect for former tops like the WTI May 25 top at $52.62, for example, and for Brent crude the $60 a barrel level. Buyers expressed caution as the markets neared they key resistance areas because some producers may be tempted to ramp up production above agreed upon levels.
Additionally, remember that the hedge funds tend to get ahead of the fundamentals so it is possible they could overbuy, stopping the rally.
Weekly Inventories Report
According to the U.S. Energy Information Administration, U.S. crude oil inventories fell 1.8 million barrels the week-ending September 22. Traders were looking for a 3.4 million-barrel build.
The EIA news provided some support for WTI crude oil, but gains were limited by an unexpected rise in gasoline stocks. Distillate stocks were down but less than anticipated.
Also pressuring prices and limiting gains was an increase in U.S. crude production. The EIA reported that production rose to 9.55 million barrels per day (bpd) last week, higher than before Hurricane Harvey hit the Texas Gulf Coast area.
Expensive Brent crude oil also drove up demand for cheaper U.S. crude oil. Exports hit a record 1.5 million barrels per day last week.
Geopolitical Events
At times, the markets were underpinned by geopolitical news. Some gains were spurred by tension around northern Iraq following the Kurdistan region's vote in favor of independence. On Thursday, Turkey promised to deal only with the Iraqi government on crude, "restricting oil export" operations to Baghdad, the office of Iraqi Prime Minister Haider al-Abadi said. The referendum vote also prompted Turkey to threaten to close the region's oil pipeline.
Traders said that shutting the pipeline could mean 500,000 to 550,000 barrels per day of crude oil may not reach the market. Analysts also put the chances of shutting down the pipeline linking northern Iraq and Ceyhan in Turkey at about 20 percent.
This issue should continue to be monitored next week.
Weekly Technical Analysis
(Click to enlarge)
The main trend is up according to the weekly swing chart. The uptrend was reaffirmed when buyers took out the former top at $52.62. The market quickly sold-off testing this level. This suggests sellers may be coming in to stop or slow down the rally.
Additionally, the WTI contract produced two potentially bearish closing price reversal tops on the daily chart this week. This typically indicates the selling may be greater than the buying at current price levels.
Brent crude oil also formed a closing price reversal on its daily chart. While the WTI contract was making a new high for the week on September 28, the Brent contract was not. This divergence on the daily chart strongly suggests a possible shift in investor sentiment, or perhaps even a change in the fundamental outlook.
The main range is $58.37 to $42.80. Its retracement zone at $50.59 to $42.42 is currently being tested. Trader reaction to this zone will ultimately decide the strength and direction of the next move.
A sustained move over $52.42 will indicate a strong upside bias. This will also indicate that traders are buying strength. This could create enough upside momentum to challenge the next main top at $54.94.
A sustained move under $50.59 will signal a strong downside bias. This will indicate that investors are forgoing buying strength in the hopes of getting long at more favorable prices.
Given the short-term range at $46.14 to $52.86, its retracement zone at $49.50 to $48.71 is the primary downside target.
Forecast
The November WTI and December Brent futures charts may look good on the weekly, monthly and quarterly charts, but the daily chart is looking a little toppy.
We're trading in nearly the same position as we were in last week and facing the same issues. Given the current position of the November WTI futures contract, inside the key retracement zone, investors are going to have to decide whether to buy strength or buy a pullback into support.
I can't foresee anything that could derail the upward bias at this time so I'm fairly confident that the next move is going to be triggered by investors buying strength or buying value. Trying to play the short side at current levels is a risky proposition.