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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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There’s Not A Lot Of Room For Error In Oil Markets

Rigs

U.S. West Texas Intermediate and international-benchmark Brent crude oil are in a position to finish the week, month and quarter sharply higher. This quite a turnaround from last month when it was trading sharply lower heading into June

Traders are also saying that all the major shorts may have been taken out with this week’s rally and that the buyers may have exhausted themselves. However, the price action on Friday suggests that buyers are still coming in and aggressively willing to chase this market higher.

Fundamentally, international Brent crude oil remains firm because looming sanctions by the White House against Iran are expected to lead to a sharp drop in supplies from the OPEC-member.

WTI crude oil is being supported by supply disruptions in Canada. North America’s oil markets have tightened significantly this week as an outage of Canada’s Syncrude has locked in over 300,000 bpd of production. The outage is expected to last at least through July, according to operator Suncot.

Besides the looming U.S. sanctions against Iran, which is fueling the rally in Brent futures, and the outage in Canada, which is supporting WTI crude, both markets are also benefitting from supply issues in Venezuela and Libya.

As far as demand is concerned, it has been making records all year, and OPEC has said it will raise output in order to meet demand and replace crude from unplanned disruptions. However, concerns have been raised this week that a trade war may cause a slowdown in global economic growth. This could lead to lower demand.

So the debate amongst traders at this time is whether there will be a surplus or a deficit in crude oil supply later this year when OPEC meets to determine its plan for next year. At the end of the three major time periods, however, the price action strongly suggests that investors are betting on a deficit.

The Fundamentals

Despite rising U.S. output, U.S. commercial crude oil inventories dropped by almost 10 million barrels in the week-ending June 22 to 416.64 million barrels, according to the EIA. That’s below the 5-year average level of around 425 million barrels.

The 9.9 million barrel draw was well-above the 2.4 million barrel estimate. It was due to high exports of almost 3 million bpd, coupled with domestic refinery activity hitting a utilization rate of 97.5, the highest in more than a decade.

Not a Lot of Room for Error

Although prices are likely to be underpinned by supply disruptions in Libya and Canada, and the looming sanction against Iran, if we do see a top forming, it will likely be fueled by concerns over demand.

Oil demand has been on a record pace all year, but conditions may be changing amid escalating trade disputes between the United States and its key trading partners, China and the European Union.

Some traders are saying that the macroeconomic view is overwhelmingly bearish. This is because credit conditions are worsening, which could have a negative impact on the demand for crude oil in the next 4-6 weeks. This could be because rising interest rates are making it harder to borrow enough money to sustain current cash flow needs.

So although the price action the last week has been impressive, it may have all been driven by technical momentum and headlines. These are short-term catalysts. Intermediate and longer-term investors are looking at rising production with OPEC and Russia producing at near maximum output and the U.S. nearing another record.

If supply continues to rise and demand should suddenly shift lower, we could be looking at a flood of oil in the market and this would be bearish for prices. At this time, it seems there is not a lot of room for error in the supply/demand equation.

Technical Analysis

(Click to enlarge)

The main trend is up according to the monthly swing chart. The uptrend resumed last week when buyers took out the May high at $72.70.

A new minor bottom has formed at $63.40. A trade through this level will change the minor trend to down. It will also signal a shift in momentum to the downside.

The major range is $89.45 to $39.88. Its 50% to 61.8% retracement zone is $64.67 to $70.51. Both levels are new support. Trading on the strong side of this zone is also a bullish sign.

Monthly Chart Forecast

Based on the strong close at the end of June, the direction of the WTI crude oil market in July is likely to be determined by trader reaction to the steep uptrending Gann angle at $71.08.

A sustained move over $71.08 will indicate the presence of buyers. It will also mean that the market is moving up at a pace of $2.00 per month. This angle has provide support and direction for 13 months, or since the $45.08 main bottom in June 2017.

The first upside target is a long-term downtrending Gann angle at $77.45. We could see a technical bounce on the first test of this angle. Taking it out, however, could trigger a further rally into the next downtrending Gann angle at $83.45. This is the last potential resistance angle before the $89.45 main top.

A failure to hold $71.08 will be the first sign of selling pressure. Crossing to the weak side of the support at $70.51 will indicate the selling is getting stronger. If this move gains traction then we could see an acceleration into $64.67.

Essentially, the strong uptrend should continue in July as long as WTI crude holds above $70.51.




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