The price action late this week in the three major futures energy markets: crude oil, gasoline and natural gas, suggests the summer sell-off may be nearing its end. Keep in mind that only the daily charts are showing signs of short-term bottoming action. The longer-term weekly and monthly charts still have downside biases.
For the most part, the trading action is being fueled by technical chart factors and not by fundamental factors. Technically, these three markets are oversold. This means that the size of the sellers on the offer is shrinking, shifting the edge to the bid side, or the buyers. The buying is being triggered by profit-taking and aggressive bottom picking.
Some of the profit-taking is related to fund buying. These money managers may be trying to book profits before the end of the quarter to enhance their performance and avoid giving back the substantial profits generated by the summer-long break.
Fundamentally, West Texas Intermediate crude oil futures rebounded this week after a weekly government report showed a larger-than-expected fall in U.S. crude oil inventory.
According to the Energy Information Administration (EIA), U.S. commercial crude oil inventories decreased by 4.5 million barrels for the week-ended August 15. Traders were looking for a drawdown of 1.3 million barrels. Although this drawdown did not put much of a dent into the total inventory, it did give short-sellers an excuse to begin booking profits following a prolonged move down this entire summer.
The price action on the daily October Crude Oil chart on August 21 suggests a bottom may have been reached based on its sizable retracement to the upside. Given the near-term range of $102.20 to $92.50, if the short-covering continues over the near-term, traders can expect a minimum retracement back to $97.35 to $98.49. Since the main trend is down, sellers are likely to come back in following a rally back into this zone.
There could be an even stronger rally next week if the market closes above $95.32 on August 22. This move would produce a weekly closing price reversal that often leads to the start of a 2 to 3 week counter-trend rally.
The technical chart action of the Weekly October Gasoline chart also suggests a bottom may be forming. This week’s sell-off barely took out last week’s low before the aggressive counter-trend buyers came in and the short-covering began. A close over 2.5750 on August 23 will form a weekly closing price reversal which could trigger the start of a strong correction. As of August 22, the market is in position to form this type of bottom.
The price action on the daily chart also suggests a short-term bottom is forming. However, the series of retracement levels at 2.5910, 2.6136 and 2.61234 suggest the rally will be labored. These levels have to be taken out with conviction in order to generate the upside momentum needed to reach the major objective of 2.7361.
In addition to the retracement levels, a number of former tops on the daily chart at 2.6634, 2.7085 and 2.7281 are also in the way of an all-out rally.
Gasoline supply continues to remain a major concern. Last week, the EIA predicted that the price trend will be down until at least December. This summer refineries produced more gasoline that was consumed. Compounding this issue was less-driving vacations and the start of an early school year. To counter the over-supply, refineries even shut down for maintenance earlier than usual.
October Natural Gas futures showed signs of life this week on the daily and weekly charts. After reaching a new contract low at 3.7400 in late July, the market followed up with a higher bottom on August 18, suggesting the trend may be ready to turn up on the daily chart.
Based on the current “W” formation on the daily chart, it looks as if the trend will turn to up on a sustained move over the August 12 top at 4.041. Taking out this level with conviction could trigger enough upside momentum to reach the first objective at 4.310 over the near-term.
Fundamentally, buyers may be coming in to lock up prices for the winter heating season. Although the supply side of the equation is still long-term bearish, there may be rally over the near-term due to hedge buying and profit-taking after the prolonged drop in prices this summer.
The price action this week in the crude oil, gasoline and natural gas markets suggests that buyers are coming in to lock in profits generated by this summer’s steep drop in prices. This should produce a temporary bounce to the upside. Aggressive counter-trend traders may want to play the upside for a short-term rally. Trend traders may want to wait for the markets to reach retracement zones before initiating new positions.