WTI Trending Up Despite Pullback

U.S. West Texas Intermediate crude oil futures spiked to their highest level since late 2014 early this week before backing away on profit-taking. The long-term fundamentals are painting a bullish picture of the market, but concerns over short-term valuations may be encouraging speculators to book profits while they position themselves ahead of further confirmation of the bullish outlook.

The week started with some light speculative buying on Monday. Some of the buying was tied to the upside technical momentum related to the previous week's strong surge. Some of it to speculation that last weekend's U.S.-led bombing of Syria would lead to a further escalation of U.S. involvement in the area or a possible conflict with Russia.

Prices sold off sharply on Monday as the military activity in Syria turned out to be a one-time event. The fact that there wasn't any retaliation from Syrian allies Russia and Iraq also contributed to the weakness.

After a slight follow-through to the downside on Tuesday, crude oil prices mounted a stronger rebound following the release of a bullish inventories report from the American Petroleum Institute.

WTI crude oil recovered all of its earlier loss for the week and spiked even higher on Wednesday, hitting its highest level since late 2014 after a U.S. government report showed U.S. crude stockpiles declined last week and as traders continued to price in the possibility of supply disruptions in several key oil-producing nations.

Additionally, the U.S. Energy Information Administration reported U.S. commercial crude inventories dropped by 1.1 million barrels in the week-ending April 13. Stockpiles of gasoline also dropped by 3 million barrels, while distillate fuels including diesel declined by 3.1 million barrels.

A surprised jump in gasoline demand also helped drive prices higher.

Crude oil continued to rally early Thursday, extending the week's gains before profit-takers took control, driving the market lower into the close. Traders were encouraged to book profits because of a rising U.S. Dollar and higher interest rates.

The subsequent daily closing price reversal top suggests the selling may be greater than the buying at current price levels. It also indicates that the buyers may be a little ahead of the fundamentals.

Despite the potentially bearish chart pattern, the market is likely to continue to be underpinned by the reimposition of sanctions on Iraq and the deteriorating situation in OPEC-member Venezuela. Both situations should lead to supply disruptions.

Additionally, the gap between supply and demand in the oil market has tightened as OPEC, Russia and other producers have nearly achieved their aim of shrinking global crude stockpiles to the five-year average.

Monthly Technical Analysis

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The main trend is up according to the monthly swing chart. The market isn't even close to turning the trend to down. The only negative this month would be a close below last month's close at $64.87.

The short-term range is $89.60 to $39.19. Its 50% to 61.8% retracement zone comes in at $64.40 to $70.34. This zone is currently being tested.

The long-term range is $106.56 to $39.19. Its retracement zone at $72.88 to $80.82 is the next major upside target.

The combination of these two retracement zones creates a target zone and potential resistance area at $70.34 to $72.88. We could see a technical bounce to the downside on the first test of this area, but this will not be a sign that the trend is getting ready to turn down.

Additionally, the major Gann angle that has been guiding the market higher since June 2017 is at $64.48. As long as prices hold above this level, the momentum should be to the upside.

Forecast

Crude oil futures are trading lower early Friday, but remain near their highest levels since late 2014. The price action suggests the market is overbought, but still underpinned by a series of bullish scenarios. The issue at this time is whether hedge funds will be willing to buy strength at current price levels, or play for a short-term correction into support.

The fundamentals are mostly bullish at this time. Ongoing OPEC-led supply cuts are proving the longer-term support. This is leading to tightness in the crude oil market that could spread to products like gasoline and distillates. Speculative support is coming from the possible reimposition of sanctions against Iran that should lead to a cut in supply. Venezuela is experiencing huge problems that could also lead to diminished supply.

One factor that could limit gains is rising U.S. production, which has jumped by a quarter since Mid-2016 to 10.54 million barrels per day. Another factor is the U.S. rig count that could increase as prices move higher.

We're bullish longer-term, but won't be surprised by a short-term correction. We expect the hedge funds to re-enter on any reasonable break into support. Although the news is potentially bullish, the rally won't last unless hedge fund buyers continue to come in to support the move. Speculative buying will not be enough to sustain the rally.