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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Why The Oil Rally Is Slowing Down

Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are in a position to post solid gains for the week. The market continue to be underpinned by worries about a supply shortage. Traders are mostly concerned about the impact of the Iranian sanctions on global supply and whether Saudi Arabia and Russia can produce enough crude oil to offset the expected shortfall.

This week, traders have been primarily focused on the impact of the Iran sanctions. The concerns are how much oil will be removed from the global supply and whether OPEC and its allies can make up the difference. The numbers are still being debated and traders may not know close to the exact amount until shortly after the sanctions begin on November 4.

Shortly after the U.S. announced the sanctions on Iran, the market estimated a reduction of between 500,000 and 2 million barrels per day of crude oil. A little after that, Saudi Arabia and Russia announced they would increase output by about 1.4 million barrels per day. This is currently where we stand with speculative buyers being driven by the notion that the increased production will fall short of the lost output.

Last week-end, OPEC and its allies discussed increasing production by another 500,000 barrels per day, but this idea was rejected because Saudi Arabia is worried it might need to limit output next year to balance global supply and demand as the United States pumps more crude.

Although the price action this week has been primarily to the upside, some news did limit the rally. U.S. crude production hit a record 11.1 million bpd in the week-ending September 21, according to data from the Energy Information Administration (EIA) on Wednesday. This is up close to a third since mid-2016.

Additionally, commercial crude stocks rose by 1.85 million barrels, to 395.99 million barrels, the EIA data showed.

The rally in WTI crude was also slowed by comments from the White House. President Trump reiterated calls on OPEC to pump more oil and stop raising prices. Additionally, Washington’s special envoy for Iran, Brian Hook, told a news conference at the United Nations General Assembly, “We will ensure prior to the reimposition of our sanctions that we have a well-supplied oil market.

Technical Analysis

Weekly November WTI Crude Oil Technical Analysis

(Click to enlarge)

After trading in a range since May, November WTI Crude Oil has finally broken out to the upside. The move isn’t complicated because we are currently trading in an area that hasn’t been approached since December 2014. The rally is also being driven by momentum which is hard to predict.

Essentially, a chart pattern like the one the market is currently following is not being driven by support or resistance, but by the headlines and the buying strength of the hedge funds and other money managers. Therefore, this early phase of the breakout will continue until the headlines turn bearish and the professional decide to book profits.

With the negative headlines should come weaker prices. However, we may only see a pullback into $70.86 to $65.15 because “old tops tend to become new bottoms”. We are not looking for a change in trend on any pullback, but a move that alleviates some of the upside pressure. This type of price action also allows for the major players to re-enter at more favorable prices. Furthermore, there is no true resistance until about $80.00.

Monthly December Brent Crude Oil Technical Analysis

(Click to enlarge)

The breakout to the upside in crude oil can be seen clearly on the Monthly December Brent Crude Oil chart. After spending nearly five months inside the $70.57 to $77.41 trading range, strong buying has driven prices through the upper level of the zone.

This is a potentially bullish long-term move if buyers can sustain the rally. This means that on any pullback in prices, traders will be willing to defend the previous resistance zone. Preventing a break back under $77.41, for example, will indicate the presence of buyers.

One can also see from the chart that there is no resistance until $99.57. Momentum will play a huge role as to whether the market trades this level and as to how fast it gets there.

Forecast

The fundamentals are bullish, but the rally has slowed a little since the U.S. said there would be plenty of supply to offset any shortfalls. This seems to have stopped the speculative buying although the market is still being underpinned.

If the U.S. doesn’t reveal its plan to offset the shortfall soon then the rally is likely to resume at a more rapid pace.

Besides the U.S. comments, gains are also being limited by increasing U.S. production and stable output from Libya. Nonetheless, the market is fragile and there is not much room for error. Essentially, all it is going to take is an unexpected supply disruption to launch another surge to the upside.




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