January West Texas Intermediate crude oil futures are in a position to close stronger on Friday, but the move isn’t expected to be enough to prevent a lower close for the second consecutive week.
Buyers may also be showing a delayed reaction to Wednesday’s U.S. Energy Information Administration’s weekly inventories report which showed a bigger than expected drop in crude oil stocks. Traders may have also overreacted to a massive rise in gasoline and distillate stocks, drawing the attention of bargain-hunters. Traders are also saying that a surprise jump in Chinese crude demand and a threat of a strike in Africa’s largest oil exporter may also be underpinning the market late in the week.
WTI crude oil was pressured all week and especially on Wednesday after the U.S. Energy Information Administration (EIA) said crude oil stockpiles fell more than expected last week as refineries increased output, but gasoline and distillate inventories posted unexpectedly large builds. Traders drove prices higher initially on the crude oil news, but the rally was stopped and prices turned lower in reaction to the gasoline and distillate reports.
According to the EIA, crude inventories fell 5.6 million barrels in the week to December 1, compared with analysts’ expectations for a decrease of 3.4 million barrels. At 448.1 million barrels, crude stocks, not including the strategic petroleum reserve, were at their lowest since October 2015.
Gasoline stocks rose 6.8 million barrels. Analysts’ were looking for a 1.7 million-barrel gain. Distillate stockpiles, which include diesel and heating oil, rose 1.7 million barrels, versus expectations for a 1 million-barrel increase, the EIA data showed.
The rise in gasoline inventories stunned traders enough to change the trend to down on the daily chart. This news suggests that refiners may not need to process as much crude in the future. Another rise in production also helped pressure prices.
The EIA report showed that U.S. production increased again. U.S. crude production climbed by 25,000 barrels per day (bpd) to 9.71 million bpd, the highest since monthly figures showing the United States produced more than 10 million bpd in the early 1970s.
The trend changed to down on the daily charts this week, which could be an indication that investors are looking for value, now that the bullish OPEC news is out there. This event may encourage the hedge funds to pare positions and play for cheaper prices. They may use the weekly chart to determine the next major value zone.
Additionally, investors are worried that soaring U.S. output will threaten to undermine efforts led by OPEC and Russia to bring production and demand into balance following years of oversupply.
At this time, the crude oil market is susceptible to heavy fund liquidation so I’m looking for prices to continue to weaken.
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The main trend is up according to the weekly swing chart. However, two consecutive lower closes is suggesting a shift in momentum to down. A trade through $59.05 will signal a resumption of the uptrend.
The main range is $46.95 to $59.05. If the downside momentum continues to strengthen then we could see a correction into its 50 percent to 61.8 percent retracement zone at $53.00 to $51.47. This is a value area. With the main trend up, a pullback into this area will likely attract new buyers.
The first downside target is an uptrending angle at $53.95. We could see a technical bounce on the first test of this angle. If it fails then look for the selling to extend into the 50 percent level at $53.00, followed by the 61.8 percent level at $51.57.
Overtaking $59.05 will indicate that buyers have returned after a two-week setback. If this move generates enough upside momentum then look for a surge into a steep uptrending angle at $60.95. This angle, moving up $1.00 per week from the $46.95 is important to the structure of the chart pattern.
Crossing to the strong side of the angle at $60.95 will put crude oil in a bullish position and could trigger an acceleration to the upside.
Once again, I have to conclude the direction of the market next week will be determined by the hedge funds. They are currently betting on the long side of the market. However, two weeks of lower closes suggests they are being a little shy about buying strength.
If the hedge funds grow tired of the sideways-to-lower trade, they may begin paring positions on the hope they can buy crude at more favorable prices. If there is a sell-off fueled by aggressive profit-taking then look for a pullback over the near-term into at least $53.00.