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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Are We About To See A Short Covering Rally In Oil?

August Crude Oil Futures

Profit-takers and bargain-hunters are helping to prop up crude oil prices from 10-month lows late in the week. Aggressive counter-trend investors may be buying relatively cheap crude oil despite bearish market sentiment due to the persistent supply glut and doubts over the OPEC-led plan’s ability to balance the market.

Despite the technical bounce, August West Texas Intermediate crude oil is still in a position to close lower for the week and month while setting their worst first-half year decline in 20 years. This is taking place despite the OPEC-led plan to reduce output, trim the global supply glut and stabilize prices.

(Click to enlarge)

This week’s price action strongly suggests that traders remain skeptical of OPEC’s ability to balance supplies. While the plan to cut production by 1.8 million barrels per day (bpd) has been in place since January, not all OPEC and non-OPEC participants have fulfilled their pledges. Additionally, their attempts are being met by soaring output from the United States.

Recent data shows that increased shale drilling has pushed U.S. oil production more than 10 percent over the previous year to 9.35 million bpd, close to the production level of top exporter Saudi Arabia.

Other reports show that inventories through April are up 80 million barrels since the beginning of the year, highlighting the inefficiency of OPEC’s market management.

Forecast

The trend is down and the fundamentals are bearish, but oversold technical conditions suggest that crude oil may be ripe for a short-covering rally. This move is not likely to lead to a change in trend, but rather set up another shorting opportunity.

The catalyst for a strong short-covering rally on Friday is likely to be the weekly rig count. It has been trending higher for 22 weeks so there is no reason to suspect this trend will change. However, because of the current low price levels, the pace of the rig count increase may begin to slow. It would come as a surprise if there were no rigs added, however, we could see a spike to the upside in prices if a few rigs are shut down.

August West Texas Intermediate Crude Oil Technical Analysis

The main trend is down according to the monthly swing chart. The market is not in a position to turn the main trend to up, but it is in the “window of time” to post a potentially bullish closing price reversal bottom. The time may be right, but the price isn’t even close. The market would have to close over $48.56 on June 30 in order to create this formation. Fortunately for bullish traders, the window of time will extend into July.

Given the current price at $42.69, the market is in a position to challenge the next uptrending Gann angle at $41.05. We could see a technical bounce on the first test of this level, but if it fails then look for the selling to extend into the next uptrending angle at $38.93. This is the last potential support angle before the $36.80 main bottom.

The main range is $36.80 to $58.30. Its retracement zone is $47.55 to $45.01. This zone is new resistance along with a downtrending angle at $48.03. Holding below this zone will continue to give the market a strong downside bias.

August Natural Gas Futures Technical

August natural gas futures had a volatile trade this week, but did nothing to suggest the market is ready to turn higher even with the start of summer.

According to the EIA, U.S. natural gas stocks increased by 61 billion cubic feet for the week-ending June 16. This fell inside the estimated range, but came in higher than the consensus estimate of 56 Bcf.

The five-year average for the week is an injection of 82 billion cubic feet, and last year’s storage injection for the week totaled 63 billion cubic feet. Natural gas inventories rose by 78 billion cubic feet in the week-ending June 9.

Stockpiles fell week over week to 10.5% below last year’s level, but remain 8.1% above the five-year average.

Additionally, the EIA reported that U.S. working stocks of natural gas totaled about 2.770 trillion cubic feet, around 207 Bcf above the five-year average of 2.563 trillion cubic feet and 324 Bcf below last year’s total for the same period. Working gas in storage totaled 3.094 Tcf for the same period a year ago.

Forecast

Thursday’s price action suggests that we may have seen the bottom, but we still need further confirmation. The sharp plunge and subsequent intraday rebound suggests the sell-off may have been exhaustion. In other works, it knocked out the last of the stubborn longs, allowing new money to step in at favorable prices.

Of course, the weather will be the final determinant as to whether we’ve hit a temporary bottom.

At this time, temperatures are comfortable across the northern eastern U.S., but remain dangerously hot over the Southwest.

Warm to hot conditions are expected to return to the Great Lakes and East with highs back into the 80’s to lower 90’s. Cooler temperatures are then expected to return.

Hot weather in key demand areas may trigger a few short-covering rallies, but unless we get a lingering, high-pressure dome in these key areas, prices are likely to fluctuate in a range. In order to fuel a meaningful rally, the bullish traders need heat and for it to stick around a while. Otherwise, it’ll be one and done on the spike rallies.

August Natural Gas Technical Analysis

(Click to enlarge)

The main trend is down according to the monthly swing chart. The trend turned down earlier this month when August Natural Gas futures took out the previous main bottom at $2.910.

The main range is $2.417 to $3.624. Its retracement zone is $3.020 to $2.878. The market is currently trading inside this zone.

Trader reaction to $3.020 to $2.878 will determine the near-term direction of the market.

A sustained move under $2.878 will indicate the selling is getting stronger. This could trigger a break into the uptrending angle at $2.737. If this fails to provide support then look for the selling to extend into $2.577. This is the last potential support angle before the $2.417 main bottom.

Holding $2.878 will indicate the presence of buyers. This could trigger a move into $3.020, $3.057 then $3.210. Needless to say the rally will be labored.

However, taking out $3.210 with conviction could trigger an acceleration into $3.370.

Basically, we’re looking for the downside bias to continue on a sustained move under $2.878 and an upside bias to begin on a sustained move over $3.020.




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