U.S. West Texas Intermediate crude oil futures are trading lower on Friday, putting the market in a position to form a potentially bearish closing price reversal top. This will be the second sign of weakness this week with the first being a change in trend to down on the daily chart.
This week's weakness isn't being fueled by a significant shift in the bullish fundamentals, but anytime crude oil supply rises especially five weeks in a row, traders are going to sit up, take notice and reassess the supply/demand situation. Furthermore, renewed concerns over a COVID-surge could also be limiting gains.
US Crude Stocks Rise More than Expected, Cushing Hub Plunges - EIA
U.S. crude stocks rose more than expected in the latest week, the government reported on Wednesday, but inventories at the Cushing, Oklahoma, storage hub dropped sharply again, suggesting markets remain tight due to steady demand and stagnant production, Reuters reported.
Crude inventories rose 4.3 million barrels to 430.8 million barrels the week ending October 22, according to the U.S. Energy Information Administration (EIA). This number was well above the 1.9 million barrels analysts had expected.
U.S. gasoline stocks fell by 2 million barrels in the week to 215.8 million barrels, the lowest since 2017, the EIA said. Distillate stockpiles, which include diesel and heating oil, fell by 432,000 in the week to 125 million barrels.
Renewed COVID-19 Concerns Threaten Recoveries in…
U.S. West Texas Intermediate crude oil futures are trading lower on Friday, putting the market in a position to form a potentially bearish closing price reversal top. This will be the second sign of weakness this week with the first being a change in trend to down on the daily chart.
This week's weakness isn't being fueled by a significant shift in the bullish fundamentals, but anytime crude oil supply rises especially five weeks in a row, traders are going to sit up, take notice and reassess the supply/demand situation. Furthermore, renewed concerns over a COVID-surge could also be limiting gains.
US Crude Stocks Rise More than Expected, Cushing Hub Plunges - EIA
U.S. crude stocks rose more than expected in the latest week, the government reported on Wednesday, but inventories at the Cushing, Oklahoma, storage hub dropped sharply again, suggesting markets remain tight due to steady demand and stagnant production, Reuters reported.
Crude inventories rose 4.3 million barrels to 430.8 million barrels the week ending October 22, according to the U.S. Energy Information Administration (EIA). This number was well above the 1.9 million barrels analysts had expected.
U.S. gasoline stocks fell by 2 million barrels in the week to 215.8 million barrels, the lowest since 2017, the EIA said. Distillate stockpiles, which include diesel and heating oil, fell by 432,000 in the week to 125 million barrels.
Renewed COVID-19 Concerns Threaten Recoveries in Europe, Russia, and China
Some of the profit-taking this week is being fueled by rising cases of COVID-19 in Europe, Russia, and China, which are threatening hopes for an economic recovery.
Concerns over an outbreak in China are drawing the most attention. The country has reported nearly 250 locally transmitted cases of COVID-19 since the start of the current outbreak 10 days ago, with many infections in remote towns along porous international borders in the country's northwest.
China had 50 new local cases for October 26, the highest daily count since September 16, official data showed on Wednesday.
"A surge in new cases of COVID-19 threatens to disrupt the recovery in oil demand," ANZ Research commodities strategists Daniel Hynes and Soni Kumari said in a new report on Thursday.
OPEC+ Expected to Stay the Course on Oil Output Plans
An OPEC+ committee largely stuck to forecasts of a strong demand rebound this year and next ahead of a meeting next week, at which the group is expected to rubber-stamp a planned output increase of 400,000 barrels per day (bpd) in December, Reuters reported.
The Joint Technical Committee (JTC), which met on Thursday, now expects oil demand to grow by 5.7 million bpd in 2021, 120,000 bpd below OPEC's forecast in its latest monthly report, two OPEC+ sources said.
The JTC left its demand forecast for next year steady at 4.2 million bpd, one of the sources said.
Weekly Technical Analysis
Weekly December WTI Crude Oil
Trend Indicator Analysis
The main trend is up according to the weekly swing chart. The uptrend was reaffirmed this week when buyers took out the previous high at $84.22. A trade through $61.11 will change the main trend to down.
Retracement Level Analysis
The minor range is $61.11 to $85.41. The market is currently trading on the strong side of its retracement zone at $73.26, making it the nearest support.
The short-term range is $55.54 to $85.41. Its retracement zone at $70.53 to $66.99 is the best support area. This zone is controlling the near-term direction of the market.
The main range is $37.70 to $85.41. If the main trend changes to down then its retracement zone at $61.56 to $55.93 will become the primary downside target and value area.
The retracement zone targets will move up as the market moves higher.
Weekly Technical Forecast
The direction of the December WTI crude oil market the week-ending November 5 will be determined by trader reaction to $83.76 on Friday, October 29.
Given the prolonged move up in terms of price and time, a close under $83.76 on October 29 will form a potentially bearish closing price reversal top. This won't change the trend to down, but if confirmed next week, it could trigger the start of a 2- to 3-week correction with $73.26 a potential downside target.
If anything, this chart pattern could become the source of heightened volatility over the near term.
Bullish Scenario
A trade through $85.41 will negate the closing price reversal top and signal a resumption of the uptrend. If this move is able to generate enough upside momentum then look for a possible surge into the next major top at $89.93.
Bearish Scenario
A sustained move under $80.58 will confirm the closing price reversal top. If this move creates enough downside momentum then look for the selling to possibly extend into $78.78.
A trade through $78.78 will indicate the selling pressure is getting stronger. This could trigger further acceleration to the downside with $74.67 the next likely target. This is the last potential support level before our primary downside target at $73.26.
Short-Term Outlook
OPEC+'s move to raise daily output by 400,000 bpd is not expected to shock prices lower. Furthermore, don't expect OPEC and its allies to succumb to pressure from major consumer nations to speed the rate of output hikes.
"Demand (for oil) can decline as there is still uncertainty. We also see there is yet another pandemic wave spreading across the world," Russian Deputy Prime Minister Alexander Novak told Reuters.
One takeaway in the EIA report is that WTI crude storage at the Cushing, Oklahoma delivery hub is likely to stay low for months.
Another takeaway is that despite the fall in stocks at Cushing, the Gulf Coast's inventories rose to 247 million barrels in the week, partly due to a net increase in imports which hit their highest since June.
Perhaps the biggest blow and one that could continue to weigh on prices over the near-term is the news that Chinese thermal coal futures saw their biggest weekly fall in over five years on Friday as the powerful state planner said there was more room to adjust coal prices after its recent investigations into producers.
This is important because earlier in the month, a sharp rise in coal prices drove some energy producers to switch to crude oil for power. At that time, some analysts were saying this move could increase demand for crude oil by 500,000 to 1,000,000 barrels per day. The news helped drive crude oil prices sharply higher as traders increased bullish bets due to harsh winter cold expectations.
If prices get cheap enough, power generators will burn coal rather than crude. This will drive oil prices lower because of dampening demand.