September Crude Oil futures finished the week sharply lower and at a new low for the year. Let’s look at the numbers.
Oil lost a little over 3.0% on Wednesday after the release of bearish weekly inventory figures. It has closed lower thirteen times in July and is rapidly approaching a 25% decline for the month. Buyers didn’t even show up when the market tested the previous contract low. This is a sign that the funds aren’t afraid to sell weakness and that buyers are pulling bids.
According to data from the U.S. Energy Information Administration, weekly U.S. crude oil inventories surprisingly rose by 2.5 million barrels during the week-ended July 17. Traders were looking for a drawdown of 1.5 million barrels. Heavy U.S. shale production and increased imports from Columbia, Ecuador, Kuwait and Nigeria were the catalysts behind the increase.
Not to be overlooked, OPEC production also continued to grow with the cartel adding another 600,000 barrels a day to the global supply glut. Saudi Arabia and Iran shared the credit for this increase.
While the main focus this week has been on overproduction, there are some traders/analysts out there who believe that the recent bearish trend of rising U.S. oil production may actually be moderating. This line of thinking, however, has not showed up in the price action.
The World Bank also put out supportive news when it increased its 2015 forecast from $53 per barrel in April to $57 a barrel. This number seems to reflect the rise from April to June. However, July has been a different story. Time for a revision, perhaps? The organization is also forecasting a drop in global demand in 2016 to 1.2 million barrels. With production increasing and demand dropping, the upside price action should continue to be limited.
With the momentum clearly to the downside in crude oil, the bearish fundamentals are not likely to change anytime soon. The focus this week is likely to be on technical factors. There is no “true” support at current price levels which puts the emphasis on chart patterns.
The best sign of a short-term bottom will be a new low next week and a higher close. It doesn’t make sense to try to pick a bottom because the downtrend is too strong. This also means that coincidental oversold indicators or oscillators will be useless. The best way to approach this market, if you are inclined to play the long side, is to wait for a low to form then buy the reversal back up. You may not get the exact low, but at least you will be trading in the direction of the change in momentum.
For those short, the best thing to do this week is to form an exit strategy. The worse thing to do after a break of this size and magnitude is to let the market dictate when and where you exit. This often leads to panic buying. This could also cause you to give back a substantial amount of your hard earned profits.
(Click Image To Enlarge)
Technically, the main trend is down. The lower tops and lower bottoms give this away. From the chart you can see that there are no identifiable downside targets. This usually means the market will go down until the bearish traders stop selling. If there were potential support points then bottom-pickers would come in with bids.
When the bears stop selling, the market usually begins to reverse up. This sends a signal to the other shorts that the selling has dried up and that maybe it’s time to take profits or lighten up on the short side. This is how the bottom will form. I don’t think one big bull trader is going to come in to stop the slide, but I do believe he may come in once the market stops going down.
This week, watch the price action and order flow when the market is making new lows. If momentum begins to slow on the downside, then start preparing for an exit and a counter-trend rally.