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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Upside Bias Lifts Oil Prices

Pipeline

U.S. West Texas Intermediate crude oil futures are in a position to finish the week nearly 5 percent higher although on a weak note due to selling pressure on Friday. On the last day of the month and week, prices are trading sharply lower as concerns over an escalating trade dispute between the United States and China dampen investor sentiment.

Losses could be limited by concerns over impending U.S. sanctions against Iran and falling Venezuelan output, which threaten supply.

Overbought conditions could also be driving the price action ahead of the long U.S. holiday week-end. It’s been 12 daily sessions since the last major bottom so the markets may be due for a near-term correction. Traders could also be using the mounting trade concerns as an excuse to book profits after a prolonged rally.

The primary stories at the end of the week deal with trade issues. U.S. President Donald Trump threatened in an interview with Bloomberg News on Thursday to withdraw from the World Trade Organization, his latest salvo in a deepening dispute between the United States and its major trading partners.

Additionally, Trump is prepared to ramp up a dispute with China and has told aides he is ready to impose tariffs on $200 billion more Chinese imports as early as next week, Bloomberg reported on Thursday.

Supply Concerns

In a nutshell, crude oil prices were primarily supported this week by expected supply issues with Iran and Venezuela, and strong momentum created by Wednesday U.S. government report which showed a bigger than expected draw in inventories.

According to reports, Iran’s August crude oil exports will likely drop to just over 2 million bpd, versus a peak of 3.1 million bpd in April, as importers cave to U.S. pressures to cut purchase orders. This despite Iran offering steep discounts for its oil.

Plunging output in Venezuela is also helping to underpin prices. According to CNBC, Venezuelan state-run firm PDVSA said on Tuesday it had signed a $430 million investment agreement to increase production by 640,000 bpd at 14 oil fields, valuing the investment at $430 million. However, given the country’s political and economic instability, many analysts doubted whether this investment would go through.

Additionally, the International Energy Agency (EIA) continued to warn of a tightening market late in the fourth quarter, due to a combination of supply concerns, and strong demand especially in Asia.

“Definitely there are some worries that oil markets can tighten towards the end of this year,” the IEA’s chief Fatih Birol told Reuters on Wednesday.

Additionally, Libya and Nigeria are also facing potential supply issues.

Are Supply Issues Being Overplayed?

A report from Bank of America Merrill Lynch, global supply could climb towards year-end because of increased non-OPEC production. The bank said new production in Canada, Brazil and the United States “should provide a substantial boost to non-OPEC supplies” during the second-half of the year “taming upside pressures on Brent crude oil prices”.

Energy Information Administration Weekly Inventories Report

On Wednesday, the Energy Information Administration said U.S. crude stocks fell more than forecast the week-ending August 24. The report offset some of the weakness generated by the previous day’s potentially bearish American Petroleum Institute’s weekly inventories data.

The EIA said crude inventories fell by 2.6 million barrels in the week to August 24, compared with analysts’ expectations for a decrease of 686,000 barrels. Crude stocks at the Cushing, Oklahoma, delivery hub rose by 58,000 barrels.

Refinery crude runs fell by 326,000 barrels per day and refinery utilization rates fell by 1.8 percentage points.

Gasoline stocks fell by 1.6 million barrels, compared with analysts’ expectations for a 370,000-barrel gain. Distillate stockpiles, which include diesel and heating oil, fell by 837,000 barrels, versus expectations for a 1.6 million-barrel increase, the EIA data showed.

Additionally, net U.S. crude imports fell last week by 657,000 bpd.

Technical Analysis

(Click to enlarge)

The main trend is up according to the weekly trend indicator chart. A trade through $71.63 will signal a resumption of the uptrend. A move through $62.60 will change the main trend to down.

The main range is $71.63 to $62.60. Its 50% level or pivot is $67.12. This price is controlling the near-term direction of the market. Look for the near-term upside bias to continue as long as the market holds above this level.

Investor sentiment will shift to the downside under $67.12, but the main trend will remain intact unless the selling is strong enough to take out $62.60.

Based on this week’s price action, the early direction of the market next week will be determined by trader reaction to a downtrending Gann angle at $69.76.

A sustained move over $69.76 will indicate the presence of buyers. This could drive the market into the next downtrending Gann angle at $70.69. Overtaking this angle will indicate the buying is getting stronger with the next potential targets $71.29 and $71.63.

A sustained move under $69.76 will signal the return of sellers. If this move creates enough downside momentum then look for the selling to extend into the next downtrending Gann angle $67.88, followed by the 50% level at $67.12.

The weekly chart opens up to the downside under $67.12 as further long liquidation is likely to take place.

Forecast

The direction of the market next week will be determined by how traders weigh the on-going supply and demand issues. At this time, based on the price action, there is a bias to the upside with traders focusing more on supply concerns.

The key will be how investors respond to the pivot at $67.12. Since the market has been essentially rangebound since June as investors continue to work out the supply and demand situation, it is possible that crude continues to straddle the pivot over the near-term. However, maintaining the strong upside bias over this level will mean that the major players are still betting on an upside breakout at some time in the future.

A sustained move under $67.12 will indicate a serious shift in investor sentiment.




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