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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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The Next Major Catalyst For Oil Prices


U.S. West Texas Intermediate crude oil is trading lower early Friday, putting the market in a position to close lower for the week. There is a price divergence between WTI and Brent crude oil that could raise concerns with some traders, but can be explained easily so I don’t think it is a major issue.

While WTI is headed lower for the week, Brent crude oil is in a position to close higher for a third week in row. Supply disruptions in Iran will have a stronger bullish influence on Brent prices, while rising U.S. inventories and production has a bigger impact on WTI prices.

Concerns that the U.S. may reimpose sanctions on Iran helped underpin the markets this week as this represents a threat to supply. Gains were likely limited by this week’s higher than expected U.S. crude oil and gasoline inventories as well as rising U.S. production.

The underlying narrative remains the same. Prices are being supported by continued adherence to the OPEC-led production cuts, increased demand from Asia, possible supply disruptions in Iran and turmoil in Venezuela.

Prices will be pressured by rising U.S. production as shale drillers try to take advantage of higher prices by ramping up activity.

The price action was choppy this week with both WTI and Brent posting two-sided moves. Crude oil traded higher on Monday and Tuesday with Brent trading through last week’s high. However, a bigger than expected jump in U.S. inventories sent crude oil futures lower. The selling continued on Wednesday on the initial reaction to the U.S. government inventories report, but the markets finished higher.

U.S. Energy information Administration Report

U.S. West Texas Intermediate and international-benchmark Brent crude oil posted a reversal to the upside late Wednesday to finish higher for the session following the release of the weekly EIA inventories report. Early in the trading day, prices were driven lower after the report showed an unexpected increase in U.S. crude oil and gasoline inventories.

According to the U.S. Energy Information Administration (EIA), crude inventories rose 2.2 million barrels in the week to April 20, compared with expectations for a decrease of 1.6 million barrels. Gasoline stocks grew by 840,000 barrels, versus forecasts for a 625,000-barrel drop.

Net U.S. crude imports fell last week by 43,000 barrels per day as exports rose nearly 600,000 bpd to a record 2.3 million bpd, according to the EIA data.

Additionally, combined exports of crude and petroleum products hit a weekly record at 8.3 million bpd, of which more than 6 million bpd was from products like gasoline and diesel fuel. Exports of distillate inventories have been strong of late, draining inventories on the East Coast, a traditional parking spot for distillates like jet fuel.

Refinery runs fell by 328,000 bpd and utilization rates fell by 1.6 percentage points to 90.8 percent of total capacity, EIA data showed.

Overall U.S. crude production continued to grow, rising last week to 10.59 million bpd.

Pressuring the market was the rise in gasoline inventories which jumped due to an extraordinary high level of imports. However, tempering the news a little was the record exports of crude oil and distillate fuel last week.

The key factor that should keep volatility at elevated levels until at least May 12 is whether the Trump Administration will restore sanctions on Iran that were lifted during the Obama Administration after an agreement over its disputed nuclear program.

Additionally, traders expect a report on Friday by energy services firm Baker Hughes to show that U.S. producers increased the rig count.

Technical Analysis

(Click to enlarge)

The main trend is up according to the weekly swing chart. A trade through $69.55 will signal a resumption of the uptrend.

The market is essentially testing the December 24, 2014 top at $69.53.

If enough buyers come in to sustain a rally over $69.55 then this may create enough upside momentum to challenge a long-term 50% level at $72.86. Not only is $69.55 resistance, but it is also the trigger point for an acceleration to the upside.

The new short-term range is $57.29 to $69.55. If there is a correction then its 50% level at $63.42 will become the first downside target.

The main range is $55.71 to $69.55. If there is a dramatic sell-off then its retracement zone at $62.63 to $61.00 will become the primary downside target.

Since the main trend is up, buyers are likely to come in on a break into the support cluster formed by a pair of 50% levels at $63.42 to $62.63.

The hedge funds are holding record long positions and they will decide whether crude oil blasts through $69.55, or pulls back into $63.42 to $62.63.

The fundamentals are bullish so the hedge funds can take their time in deciding how they want to play the next move. The next move will likely be determined by whether the news is strong enough to force the hedge funds to buy strength, or encourage them to buy weakness.

Once again, the next major market driving event will be President Trump’s decision on Iran. If he decides to reimpose sanctions on Iran then WTI crude oil is likely to blast through $69.55.

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