April crude oil futures are poised to close higher for the week. It wasn’t an agreement to freeze production at January levels that drove the market higher. It wasn’t a drop in supply either. The market found support after weekly data from the U.S. government revealed a decline in weekly domestic crude output.
The week began with OPEC and Non-OPEC members still discussing a potential production freeze. Saudi Arabia and Russia are still behind the proposal, but Iran is not, calling it “a joke”. The Saudis are pretty firm about freezing production, but totally against cutting production, saying recently “it won’t happen”.
U.S. crude oil supply continued to rise. The American Petroleum Institute reported a 9.9 million barrel increase for the week-ended February 26. The U.S. Energy Information Administration reported that inventories rose 10.4 million barrels during the same time period. Both reports exceeded the 2.5 million barrel estimate. Once again I have to ask myself, “How can they both be so far off from the actual?”
The jump in supply didn’t matter this week, however, because the professionals appear to have shifted their focus from the past to the future. Oil supply is being perceived as old news while oil production is being looked at as the future.
This week, the EIA reported that total crude production fell by 25,000 barrels to stand at 9.077 million barrels a day. This is a positive for crude prices, but gains are likely to remain capped because…
April crude oil futures are poised to close higher for the week. It wasn’t an agreement to freeze production at January levels that drove the market higher. It wasn’t a drop in supply either. The market found support after weekly data from the U.S. government revealed a decline in weekly domestic crude output.
The week began with OPEC and Non-OPEC members still discussing a potential production freeze. Saudi Arabia and Russia are still behind the proposal, but Iran is not, calling it “a joke”. The Saudis are pretty firm about freezing production, but totally against cutting production, saying recently “it won’t happen”.
U.S. crude oil supply continued to rise. The American Petroleum Institute reported a 9.9 million barrel increase for the week-ended February 26. The U.S. Energy Information Administration reported that inventories rose 10.4 million barrels during the same time period. Both reports exceeded the 2.5 million barrel estimate. Once again I have to ask myself, “How can they both be so far off from the actual?”
The jump in supply didn’t matter this week, however, because the professionals appear to have shifted their focus from the past to the future. Oil supply is being perceived as old news while oil production is being looked at as the future.
This week, the EIA reported that total crude production fell by 25,000 barrels to stand at 9.077 million barrels a day. This is a positive for crude prices, but gains are likely to remain capped because of the huge supply. So if a market is being underpinned by some friendly data and capped by some not-so-friendly data then we essentially have a range bound or sideways market. And that is what we are seeing on weekly charts.
Some traders tried to explain the surge in supply by blaming it on refinery maintenance season. This is leading to weakening demand for crude oil that is refined into products such as gasoline. The decline in production can be explained by the massive cuts in capital spending by the oil companies.
The refinery maintenance season will come and go, but traders aren’t sure how long output will continue to fall. This is the unknown that could produce volatility in the market over the near-term. Some traders are giving producers a couple more months to put a serious dent in output. Others are looking six-months ahead. The key here is that there is a timetable. If U.S. output doesn’t start dropping off more quickly, then the entire bottoming process taking place at this time could unravel fairly quickly.
While some traders are looking at time in their decision process, U.S. shale firms may be looking at price. Earlier in the week, Continental Resources Inc. chief financial official John Hart said the company is prepared to increase capital spending if U.S. crude reaches the low to mid $40s range,
Whiting Petroleum Corp, the biggest producer in North Dakota’s Bakken formation, will stop fracking new wells by the end of March, but would “consider completing some of these wells “if oil reached $40 to $45 a barrel, Chairman and CEO Jim Volker told analysts.
Last year, these and other companies were saying they needed oil above $60 a barrel to produce more. Now they appear to be ready to settle for a lot less.
So going into the new week, we have a possible production freeze and further declines in output, supporting prices and the threat of a rebound in U.S. shale production suggesting a possible cap. When this occurs, perhaps the best thing to do is to look at the chart and try to identify pivot points that will show us where the bulls and the bears are taking control.
(Click to enlarge)
The Weekly April Crude Oil chart shows us that the main trend is down due to the series of lower tops and lower bottoms, but that momentum has shifted to the upside since the bottom at $28.74.
The short-term range is $36.28 to $28.74. Its pivot price is $32.51. As long as the market stays in this range then the pivot price will control the direction of the trade. Currently, April crude oil is trading above the pivot so there is an upside bias.
The longer-term range is $51.25 to $28.74. Its pivot price is $40.00. This price is the primary upside target on the weekly chart and also the price that could lead to increased production by U.S. shale producers. Technically, traders tend to sell at 50% retracement levels so it is a resistance level.
Another indicator to watch that will tell us the strength of the buying and selling is the downtrending angle, moving down $1.00 per week from the $51.25 main top. This price guided price lower for 16 weeks or since the week-ending November 6.
This angle came in at $34.25 the week-ending March 4 and will drop down to $33.25 the week-ending March 11. This week, the market crossed to the strong side of the angle, putting crude oil prices in a bullish position.
If buyers can sustain the rally over the angle and the short-term pivot price over the near-term then we could be looking at a possible acceleration to the upside since the weekly chart indicates there isn’t much to stop the market from reaching the $40.00 objective. The recent high at $36.28 may become a key factor because it is likely to act like a trigger point for a strong price surge.
Crossing to the weak side of the angle at $33.25 next week will indicate that the buying isn’t strong enough to sustain a rally. A sustained move under the short-term pivot at $32.51 will indicate the selling is getting stronger.
The primary focus for traders during the week-ending March 11 should be on the $33.25 to $32.51 area. Watch the order flow and price action on a test of this area because it will tell us whether the bulls are gaining control, or if the sellers are taking back control.
