U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching higher on Friday, but the markets remain in a tight range for a third session after posting a more than 10% gain on Monday and a 5% drop on Tuesday. Nonetheless, crude oil is still in a position to finish about 6% higher for the week on the back of elevated tensions in the Middle East, following the September 14 attack on Saudi Arabian oil production facilities.
The gains this week are the risk premium traders have placed on the market just in case the Saudis can’t repair their oil production facilities in a timely manner.
Short-term, U.S. crude investors should probably assume that oil will stabilize in the $57.73 to $59.29 per barrel range and Brent in the $62.00 to $63.21 range with risk skewed to the upside. At this time, most traders agree that the central message from the attacks is the vulnerability of Saudi infrastructure. This is another reason for the placing of a risk premium.
Trading conditions have calmed considerably since last Sunday’s gap-higher opening and follow-through spike to the upside. However, the subsequent price action suggests that much of that move was fueled by short-covering and buy stops with very few speculators chasing prices higher. Since that initial move took place, the main concern for traders hasn’t been how much oil was lost due to the attacks, but whether Saudi Arabia will be able to repair its damaged oil production facilities in a timely manner.
Global Spare Capacity Worries
Underpinning the market this week have been worries that the attacks on Saudi Arabia limited the country’s spare capacity. This is often referred to as “insurance” against any unplanned outage.
The attacks and outage occurred at a time when global available spare capacity is extremely low. This leaves little room for additional unplanned outages, which tends to be very supportive for prices.
Earlier in the week, the Saudis said they could restore its lost production by the end of this month, and bring its output capacity back to 12 million barrels per day by the end of November. In the meantime, it said it had restored supplies to customers at levels prior to the attacks by drawing from its oil inventories.
The move by the Saudis to meet customer needs suggests they will have no spare capacity for at least the next two and a half months or by the end of November. This means they will have no way to absorb any future shocks to production or supply.
Following the attacks, President Trump looked at several ways to retaliate against Iran, who has been largely blamed for the attacks. Trump chose to order the Treasury Department to “substantially increase” sanctions on Iran. This disappointed traders who were looking for a military response.
Additionally, U.S. crude oil inventories increased 1.1 million barrels from the previous week, according to the Energy Information Administration (EIA). Traders were looking for a decrease of 2.1 million barrels. This also helped put a lid on prices.
Due to the attacks and the lost production, the demand picture is likely to be skewed so the EIA reports may show larger-than-average draws of U.S. crude oil inventory for several weeks.
We’re looking for the risk premium to remain intact for several weeks since the Saudis are drawing on inventory, repairs are still taking place and the threat of further attacks on their oil production facilities have not been contained or eliminated.
Before the market can really become stable, Saudi inventories are going to have to return to pre-attack levels, the damaged facilities are going to have to be repaired and working at full capacity and further threats will have to be prevented.
That’s a lot to ask for so traders have to take protection against the worst case scenarios. In my opinion, this this likely to keep prices supported.
Weekly November West Texas Intermediate Crude Oil Technical Analysis
The main trend is up according to the weekly swing chart. The main trend turned up this week when buyers took out the previous main top at $60.77. The trend is safe at this time. It will change to down on a trade through $50.48. The only pattern that bullish traders have to worry about is a closing price reversal top.
The main range is $73.52 to $45.05. Its retracement zone at $59.29 to $62.64 is still potential resistance. It is essentially controlling the longer-term direction of the market.
The minor range is $50.48 to $63.89. Its 50% level at $57.19 is potential support. Holding above this level will indicate that momentum is still trending higher.
The short-term range is $45.05 to $63.89. Its retracement zone at $55.14 to $52.76 is the major support.
Based on this week’s price action and the change in trend to up, the direction of the November WTI crude oil market the week-ending September 27 is likely to be determined by trader reaction to the main 50% level at $59.29.
A sustained move over $59.29 will indicate the presence of buyers. If this creates enough upside momentum then look for a possible rally into the main Fibonacci level at $62.84.
Overcoming $62.84 will indicate the buying is getting stronger. This could trigger potential breakouts over $63.89 and $65.23. Both are potential trigger points for an acceleration to the upside with $73.52 the next major target.
A sustained move under $59.29 will indicate the buying is weakening, or the selling is increasing. Taking out $57.19 won’t change the trend, but it will shift momentum to the downside. This could trigger a further break into $55.14 to $52.76.
We’re expecting an upside bias over the near-term because of the current risks to supply. However, if traders decide to play for value then we could see a move back to support at $57.19 before prices move higher.
A strong rally over $59.29 will be an early indication that Saudi Arabia may be having trouble repairing its infrastructure.