August Lows Now A Reasonable Downside Target

Crude Oil 

Crude oil futures are expected to finish the week lower in a move solidified by the release of a bearish U.S. stockpiles report on November 12. Government data showed the seventh consecutive weekly build in crude stockpiles, driving futures prices into their lowest levels since late August.

According to the U.S. Energy Information Administration, crude oil inventories rose by 4.2 million barrels to 487 million in the week-ending November 6. The surge in inventories was well above trader estimates of a 1 million barrel rise. Total crude oil inventories are now within striking distance of the modern day record high of 490 million barrels reached in April.

The news out of Cushing, Oklahoma was also bearish with the key futures hub showing a 2.237 million barrel increase in supply. This was the biggest weekly increase since March 2015.

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Technically, the main trend is down according to the weekly swing chart. After two weeks of consolidation, the selling pressure was strong enough to take out the closing price reversal bottom formed the week-ending October 30 at $43.52.

The market is also in a position to finish the week on the bearish side of a key retracement zone at $46.01 and $44.58. This is another sign of increasing selling pressure. If the downside momentum continues then the late August bottom at $39.97 becomes a reasonable downside target.

With three weeks to go before the OPEC meeting on December 4, the question is whether sellers will continue to pound prices into the low for the year at $39.97, or attempt to consolidate inside the $44.58 to $46.01 retracement zone in the hope that OPEC members will say something bullish.

While the short-term fundamental picture remains decisively bearish, according to the International Energy Agency, the moves by U.S. oil companies will likely lead to a sharp fall in crude production. Early last week, the IEA warned that the supply of oil could tighten in the coming years due to the decline in investment.

The U.S. EIA also revised its estimate for U.S. crude production in 2016 down by 90,000 barrels per day and is now forecasting a decrease of 520,000 barrels per day. Other analysts see crude oil production reaching 8.5 million barrels per day by September 2016.

The current price action indicates that a price recovery into the end of this year is highly unlikely, but suggests that we will see higher prices next year.

Unleaded Gasoline

January Unleaded Gasoline futures are in a position to finish the week lower despite a greater-than-expected drop in gasoline inventories the week-ended November 6.

The weekly chart indicates that prices have been consolidating slightly under a major 50% level at 1.5069 and slightly above a minor retracement zone at 1.3140 to 1.2815 for eleven weeks. This corresponds with the fundamentals which have been hovering at seasonal record highs since early October.

Sellers regained control this week, driving the market below the minor retracement zone and perhaps creating enough downside momentum to trigger a further break towards the contract low at 1.1763. This occurred despite an EIA report which showed a greater-than-expected 2.1 million barrel draw down in supply.

The direction of gasoline futures over the near-term is likely to be determined by trader reaction to the retracement zone at 1.3140 to 1.2815. Holding this zone will suggest the presence of buyers. A failure to hold this area will indicate that traders are looking for supply to continue to increase.

Strong demand will be the main reason gasoline regains and holds support. The recent price action suggests that demand along with technical factors had been encouraging investors to explore the long side of the market.

Current data shows that gasoline margins in Europe have tripled since mid-October as low prices boosted consumption. There is also data supporting increased demand in the United States. However, an economic slowdown in China and perhaps in Japan could hurt demand in Asia.

The key level to watch this week is the short-term Fibonacci level at 1.2815. This level is likely to act like a pivot so trading may take place on both sides of this price until traders decide to pick a direction.