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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Strong Short Sellers Dominate Crude Markets

Oil

Crude oil and natural gas futures posted similar moves this week. Both markets surged to the upside to levels not seen since June. Both of their rallies came close to triggering strong breakouts to the upside and both of their moves ended with violent closing price reversal tops on the daily chart.

This trading pattern typically indicates the selling is greater than the buying and that the crude oil and natural gas markets are still being controlled by strong-handed short-sellers.

The final blow to the bullish traders will be closing price reversal tops on the weekly chart. Crude oil currently trading lower for the week after the strong rally earlier in the week. And there is enough downside momentum in natural gas to turn this market lower for the week also.

Weekly September Natural Gas Recap

Natural gas futures are trading lower early Friday. Sellers took out the previous day’s low, confirming the closing price reversal top and setting up the market for a 2 to 3 day correction into at least $2.966 to $2.934.

Prices rose slightly following the release of the weekly government storage report on Thursday before sellers slammed the futures contract into the close. This happens often because the storage report is old data and traders are already looking ahead at new data like a weather report.

According to the U.S. Energy Administration (EIA), utilities added 28 billion cubic feet (bcf) of gas into storage during the week-ending July 14. This left inventories about 5 percent above normal for this time of year. It was also the smallest injection for the week since 2012.

The EIA report was actually good news because investors were looking for a 32 bcf decline. Prices rallied accordingly. The five-year average build for this time period was 59 bcf.

After the initial rally in response to the larger-than-expected draw, natural gas prices fell sharply lower in reaction to new weather forecasts calling for less cooling demand next week and a slow but steady rise in production.

Meteorologists forecast temperatures in August would be near normal after a warmer-than-normal June and July. This would be bearish for natural gas because it would likely mean storage would come in at about 1.7 trillion cubic feet during the April-October injection season.

Although the price action on the daily chart is enough to shift momentum to the downside, the outlook for natural gas will turn extremely bearish if the market closes below $2.971 on Friday.

Weekly September Natural Gas Technical Analysis

(Click to enlarge)

The main trend is down according to the weekly swing chart. A trade through $3.506 will change the main trend to up. We’re not even concerned about this price level.

The minor top is $3.114. A trade through this price will change the minor trend to up. This price was identified successfully this week when the rally stopped at $3.101.

The short-term range is $2.830 to $3.101. Its 50% level or pivot is $2.966. This price is controlling the short-term direction of the market. A sustained move over this price will mean that speculative buyers are still trying to trigger a counter-trend rally.

Breaking through $2.966 will signal the selling is getting stronger. This may generate enough downside momentum to challenge the last bottom at $2.830.

The main range is $3.506 to $2.830. If the market does rebound and the buying is strong enough to take out $3.144, it’s still going to have a hard time getting through the retracement zone at $3.168 to $3.248.

Weekly September WTI Crude Oil Recap

September WTI crude oil is trading lower on Friday after confirming the previous day’s potentially bearish closing price reversal top. The selling has been strong enough to turn the market lower for the week. So in less than one day, crude oil went from trending higher on the daily chart to trading weaker on the weekly chart.

Most of the selling pressure is coming from position-squaring ahead of the week-end and a key meeting of major oil producing nations on July 24 in St. Petersburg Russia.

Prices were driven higher early in the week on the back of a bullish government report, but gradually gave back gains throughout the session Thursday as investors gave up on the long side due to technical chart factors and fundamental concerns.

On Wednesday, the U.S. Energy Information Administration reported that U.S. commercial crude inventories fell by 4.7 million barrels in the week-ending July 14. This was better than the 3.2 million barrel draw forecast.

Gasoline stocks also drew down more than expected, dropping 4.4 million barrels, and distillates posted a surprise draw of 2.1 million barrels. Analysts were looking for a 1.2 million barrel build.

Crude oil prices rallied on the news despite the EIA reporting increased U.S. daily production of 9.43 million barrels per day (bpd).

The outcome of the key meeting between six ministers from OPEC and Non-OPEC producers, including Saudi Arabia and Russia, in St. Petersburg, Russia could set the tone of the crude oil market next week. They are scheduled to discuss compliance with production cuts and progress toward market rebalancing.

Russia appears ready to continue working with OPEC to help rebalance oil markets. It seems to like the flexible approach by OPEC’s leader Saudi Arabia to accommodate rising output from Nigeria and Libya.

“We welcome the constructive approach and flexibility of our partners in addressing the challenges which arise on the path towards a balanced market,” a source, who is close to the Russian delegation negotiating with OPEC, said.

“Russian itself is fully committed to the spirit of the initiative aimed at stabilizing global crude markets and will continue working with other countries to achieve this goal.”

Earlier in the week, the Saudi’s said they hoped to accommodate the rise in production from Libya and Nigeria through supply adjustments elsewhere but emphasized a need to work together with other producers.

Traders are also expected to response to today’s U.S. rig count from Baker Hughes. A decline in the number of rigs should undermine the market. Another increase should lead to a sell-off.

Weekly September WTI Crude Oil Technical Analysis

The main trend is down according to the weekly chart. A trade through $52.38 will change the main trend to up.

The main range is $52.38 to $42.27. Its retracement zone at $47.33 to $48.52 stopped the market when it hit its high for the week at $47.74.

The short-term range is $42.27 to $47.74. If the selling pressure continues then we could see a test of $45.01 to $44.36. Aggressive counter-trend buyers may come in on a test of this zone. They are going to try to produce another potentially bullish secondary lower bottom. If this zone fails as support then traders may go after the bottom at $42.27.

Based on this week’s price action, it looks as if crude oil will have to take out $48.52 to trigger an acceleration to the upside.

Holding inside $47.33 and $45.01 will indicate trader indecision. This will likely lead to a rangebound market.





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