Crude Oil Outlook
Crude oil futures began the week in a position to rally based on the technical chart pattern formed the weak-ending January 16, however, there was no follow-through move to confirm the potentially bullish pattern. This is a good indication the market is in the hands of strong sellers.
When dealing with technical chart patterns and especially those that go against the dominant trend, the follow-through or confirmation move is the key. Without it, the move is just a guess and quite risky since it is usually in the opposite direction of the main trend and against the fundamentals.
The case for a follow-through to the upside was weak to begin with. The fundamentals hadn’t changed. The supply and demand situation was still bearish, but hedge and commodity fund managers were beginning to show interest in the long side which slowed down the rate of descent and actually produced a signal that could’ve generated a $20 retracement to the upside without a signal change in the fundamental supply/demand situation.
Outside events were largely behind the formation of the chart pattern. On January 15, the Swiss National Bank announced the lifting of the Swiss Franc’s four-year peg against the Euro. The created a volatile situation in the financial markets that could’ve had a spillover effect on the commodity markets – namely crude oil futures.
Several hedge and commodity funds were caught in the financial turmoil…
Crude Oil Outlook
Crude oil futures began the week in a position to rally based on the technical chart pattern formed the weak-ending January 16, however, there was no follow-through move to confirm the potentially bullish pattern. This is a good indication the market is in the hands of strong sellers.
When dealing with technical chart patterns and especially those that go against the dominant trend, the follow-through or confirmation move is the key. Without it, the move is just a guess and quite risky since it is usually in the opposite direction of the main trend and against the fundamentals.
The case for a follow-through to the upside was weak to begin with. The fundamentals hadn’t changed. The supply and demand situation was still bearish, but hedge and commodity fund managers were beginning to show interest in the long side which slowed down the rate of descent and actually produced a signal that could’ve generated a $20 retracement to the upside without a signal change in the fundamental supply/demand situation.
Outside events were largely behind the formation of the chart pattern. On January 15, the Swiss National Bank announced the lifting of the Swiss Franc’s four-year peg against the Euro. The created a volatile situation in the financial markets that could’ve had a spillover effect on the commodity markets – namely crude oil futures.
Several hedge and commodity funds were caught in the financial turmoil which could’ve triggered a massive turnaround in the crude oil market if these major traders had been forced to liquidate their oil positions in order to raise cash and meet margin calls.
This is a prime example as to why as a speculator, it is suggested that you use trailing stops and keep aware of the link between all markets. While the true fundamentals of the crude oil market remained bearish, the market could’ve retraced substantially, forcing a massive short-covering rally, simply because a hedge fund was overexposed in a currency market.
The move by the SNB and the size of the moves it generated also means that as a speculator you should have an exit strategy in mind even though the crude oil market is in a prolonged downtrend and the fundamentals remain overwhelmingly bearish. This is because the current steep downtrend was triggered by OPEC’s bearish decision to leave production levels and it could end with a decision by the cartel to slash production. This type of decision would also cause a disruption in the markets of similar magnitude as the Swiss National Bank announcement.
Basically we are rapidly approaching price levels as evidenced by the recent fund buying that could encourage some light short-covering. Some technical analysts believe that the technical signals precede the fundamental news so if the charts continue to produce potentially bullish signals then at the very least, you as a speculator should have an exit plan in place just in case there is a certain event that triggers the start of a rally.
As it stands, last week’s technical signal was never confirmed so the week is ending with the downtrend firmly entrenched. The key level to watch for chart watchers remains the $51.73 level for the March crude oil traders. This could be the trigger point for the start of a rally, provided the current bottom at $44.78 holds as support.
The fundamentals were mixed last week. The U.S. Commodity Futures Trading Commission’s weekly Commitment of Traders report showed that hedge and commodity funds had increased net-long positions by 12 percent the week-ended January 13. This was the largest increase since March 2011. While it may not have been enough to change the trend or even trigger the start of a meaningful short-covering rally, it should be noted because the buying was strong enough to hold the market in a range for over a week.
If the plan by OPEC was to damage U.S. production then it appears to be working since last week, Baker Hughes Inc. (BHI) announced another drop in the U.S. oil rig count. The reduction of 209 rigs represented the steepest six-week decline since the company began tracking the data in July 1987. The total fell 55 in the week-ended January 16 to 1,366.00.
In addition to the drop in the number of rigs, several major oil players also announced investments cuts in new projects as well as layoffs. Baker Hughes announced its plans to lay off about 7,000 employees or about 11% of its workforce. Schlumberger announced plans to cut 9,000 employees. Suncor Energy, Halliburton and Apache Oil also announced job cuts.
Finally, crude oil appears to be ending the week on a sour note with futures tumbling on January 22 after the Energy Information Administration announced the largest build in U.S. crude stocks in at least 14 years. According to the EIA, crude stocks rose by 10.1 million barrels to a total of 397.9 million. This increase beat trader estimates of a 2.6 million barrel build.
In summary, the longer-term fundamentals remain bearish, but the recent buying by the funds appears to have slowed the downside momentum at least in the short-run. The size of the weekly increase in oil stocks should be noted because it may represent capitulation. Next week’s price action will confirm that this is taking place if the hedge and commodity fund traders continue to fade the news. There is no clear turnaround in the market yet, but the set-up is there for a rebound rally so at the very least it is suggested you have an exit strategy in place as protection against a possible short-covering rally.
