March West Texas Intermediate Crude Oil futures are trading inside last week’s and the previous week’s range, suggesting investor indecision and impending volatility. Since the first of the year, the price action can best be described as balanced.
The balanced price action can be attributed to two factors, the OPEC/non-OPEC plan to cut output and the rising U.S. production.
Helping to underpin the market this week is the news that OPEC and non-OPEC members are complying with the plan to reduce output. A report early in the week said that the nations involved in the program have reduced output by about 1.5 million barrels per day versus the 1.8 million barrels pledged.
Helping to put a cap on the market is the news of increased U.S. oil production. According to the U.S. Energy Information Administration, crude oil stockpiles rose by 2.8 million barrels in the week-ending January 20, roughly in line with expectations. The EIA also reported that gasoline stocks rose by 6.8 million barrels, versus a 498,000-barrel gain estimate. Distillate stockpiles also increased by 76,000 barrels, versus expectations for a 1 million-barrel drop.
Other than the weekly chart pattern, there is nothing in the fundamentals to suggest a breakout in either direction is imminent. I just know from reading charts that the current pattern indicates we are going to see a volatile move over the near-term. However, the charts can’t tell us the direction.
Typically with this type of chart pattern, traders just go with the move. In other words, buyers come in strong on breakouts over resistance and breakdowns under support. Of course with any breakout move, the key is trading volume. In order to be successful, any breakout has to be accompanied by rising volume, or it will fail.
Weekly March Crude Oil Chart Analysis
(Click to enlarge)
Once again, we’re going back to the weekly swing chart to help us determine the direction of the March futures contract next week. I believe that this chart has been working the best.
The main trend is up according to the weekly swing chart. We know this because of the series of higher-tops and higher-bottoms.
Based on the current price at $53.84 on January 26 and the price action the last few weeks, the direction of the March Crude Oil chart next week is likely to be determined by trader reaction to the major Fibonacci level at $54.25.
Simply stated, a sustained move over $54.25 with rising volume will indicate the presence of buyers. This could generate the upside momentum needed to challenge the high from December at $56.24 and the main top from September at $56.59.
A sustained move under $54.25 will signal the presence of sellers, or that a big seller is coming in to prevent a breakout over the main resistance.
The weekly chart indicates there is room to the downside with two key targets coming in at $50.69 and $50.37. We can get there by two ways. We can see a steady grind accompanied by steady selling volume, or we can see an acceleration to the downside. This will likely be triggered by aggressive selling, shorting and sell stops. If this scenario develops, then it will likely be triggered by bearish headline news.
March Natural Gas
Like the March WTI Crude Oil contract, the March Natural Gas futures contract has also been rangebound for several weeks except that the sideways trade has been fueled by more volatile price action.
The reason for the sideways trade has been the relatively mild winter. This has helped put a lid on the rallies, while the steady drop in storage has helped underpin the market.
This week, the market is set to close higher because of predictions of colder weather during the first week of February. Despite the recent shift in the weather pattern, all we saw this week was aggressive short-covering rather than new buying. We know this because the open interest dropped this week when the market firmed on the daily charts.
If we are going to get a sustainable rally during February then we are going to need to see a lingering cold system, not just a few sporadic Arctic blasts. If we get extremely cold temperatures that stick around in key demand areas then we could see a rally triggered by short-covering and aggressive speculative buying.
Weekly March Natural Gas Analysis
(Click to enlarge)
The weekly swing chart indicates the main trend is down. However, momentum is trending higher. This conflict is helping to produce the range bound trade.
The main trend will turn up on a trade through $3.828. A trade through $3.110 will signal a resumption of the downtrend.
A series of retracement levels are also controlling the short-term direction of the market.
Based on the close at $3.349 on January 26, the nearest upside targets are $3.469, $3.537 and $3.554. These price levels should be considered resistance. If they are challenged then expect a labored rally until the buying is strong enough to take out $3.554. This is the trigger point for an acceleration to the upside with the next two targets coming in at $3.789 and $3.828.
On the downside, the first target is $3.296. This is followed by a relatively tight cluster at $3.170, $3.148 and $3.110.
If $3.110 fails as support then this would signal that perhaps the bullish investors have thrown in the towel for this heating season.
Unless there is a drastic shift in the weather forecast to extremely cold temperatures, we’re likely to remain rangebound next week inside the $3.469 to $3.296 range.