The Stimulus Rally In Oil Isn’t Over Yet

U.S. West Texas Intermediate crude oil futures are trading slightly lower on Friday, but still holding on to its weekly gains. The price action is being manipulated by escalating tensions between the United States and China against a backdrop of rising coronavirus cases, which could be dragging down fuel demand. At times this week, the market also reacted to the extremely weak U.S. Dollar, which made the dollar-denominated asset more attractive to foreign buyers.

The market took on a bullish tone early in the week when the European Union announced the approval of a massive recovery fund to help Euro Zone economies devastated by the coronavirus. The ensuing rally is responsible for nearly all of the market’s gains this week.

The EU news was so bullish that it encouraged traders to ignore a surprise build in U.S. crude oil inventories and worries that a surge in U.S. coronavirus cases could cap fuel demand. However, ahead of the weekend, it looks as if these factors are weighing on prices, creating a weaker tone that could extend into next week.

The following were the major stories driving the price action this week.

Escalating US-China Tensions Raising Concerns Over Economic Recovery

Helping to weigh on prices on Friday was the announcement that China ordered the United States to close its consulate in the city of Chengdu on Friday, responding to a U.S. demand this week that China close its Houston consulate, as relations between the world’s two largest economies deteriorate.

Some traders fear that this current diplomatic spat will bring the two economic powerhouses closer to canceling Phase One of their trade deal signed in January. This could slow down the economic recovery in both countries, pressuring demand for crude oil and fuels.

EU Strikes Massive Stimulus Deal

WTI crude oil rallied to a four-month high on Tuesday after the European Union (EU) struck a deal for a massive stimulus plan to revive their coronavirus-hit economies. European Union officials are hailing the agreement as an important sign of unity and a foundation for recovery.

U.S. Energy Information Administration Weekly Inventories Report

The EIA reported Wednesday that U.S. crude inventories rose by 4.9 million barrels for the week ended July 17. That compared with an average forecast by analysts polled by S&P Global Platts for a decline of 1.9 million barrels.

The EIA also reported gasoline supplies fell by 1.8 million barrels, while distillate stockpiles climbed by 1.1 million barrels. Analysts at S&P Global Platts were looking for a supply decline of 2 million barrels for gasoline and an inventory increase of 280,000 barrels for distillates.

The EIA data also showed crude stocks at the Cushing, Oklahoma storage hub edged up by about 1.4 million barrels for the week.

Late Tuesday, the American Petroleum Institute on Tuesday reported a climb of 7.5 million barrels, according to sources.

Fundamental Summary

It’s not complicated. The price action next week will be primarily dictated by U.S.-China relations, whether the U.S. can gain control of the surge in coronavirus cases and the size of the fiscal stimulus package currently being debated in the U.S. Congress.

Weekly Technical Analysis

Weekly September WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. The uptrend was confirmed this week when buyers took out $41.74. The main trend will change to down on a trade through the last swing bottom at $35.01.

The main range is $61.44 to $21.99. Its 50% to 61.8% retracement zone at $41.72 to $46.37 is potential resistance. This zone was tested this week, but the rally stalled at $42.51. This retracement zone is controlling the longer-term direction of the market.

The short-term range is $21.99 to $42.51. Its retracement zone at $32.25 to $29.83 is potential support.

The minor range is $35.01 to $42.51. Despite the uptrend, momentum will shift to the downside if its 50% level at $38.76 fails as support.

This week, the market also filled in the price gap left on March 13. However, buyers did not read this a particularly bullish signal.

Weekly Technical Forecast

Based on this week’s price action, the direction of the September WTI crude oil futures contract the week-ending July 31 is likely to be determined by trader reaction to the main 50% level at $41.72.

Bullish Scenario

A sustained move over $41.72 will indicate the presence of buyers. Taking out $42.51 will indicate the buying is getting stronger. This is a potential trigger point for an acceleration to the upside. The weekly chart indicates there is plenty of room to the upside with the next major target the Fibonacci level at $46.37.

Bearish Scenario

A sustained move under $41.72 will signal the presence of sellers. This could trigger a quick break into the minor support at $38.76. Since the main trend is up, buyers are likely to come in on the first test of this level.

If $38.76 fails as support then look for a possible acceleration into the main bottom at $35.01. Buyers could come in to defend the uptrend.

If $35.01 is taken out, the main trend will change to down. This could lead to a test of the short-term retracement zone at $32.25 to $29.83.

Technical Summary

To some traders, filling in the gap left in March fulfilled their bullish objective. That may be the reason why the rally stalled at $42.51. Other traders may have been satisfied with reaching the main retracement zone at $41.72 to $46.37.

This week’s price action indicates that the market has reached a critical level. Buyers are going to have to decide whether to buy strength and drive the market through $42.51 and into $46.37, or play for a pullback into the value area defined as $32.25 to $29.83.

Essentially, look for the upside bias to continue on a sustained move over $41.72, and for a downside bias to develop on a sustained move under $38.76.