Crude oil traders acted like they had just awakened from a deep sleep on Thursday when they drove the September futures contract into its lowest level since April 26. Prices dropped more than 1 percent after traders finally reacted to the rise in U.S. gasoline inventories that pushed supplies in the U.S. to a record high.
U.S. West Texas Intermediate crude for September delivery settled at $44.55, down 2.10 or 4.50% for the week and there is still one more session before the week-end. Given the bearish momentum into Thursday’s close, sellers could hit the market again even harder, leading to a potentially bearish follow-through move next week.
With the market facing downside risks over the near-term, there is no question that long investors are going to tighten up sell stops under key support areas that when touched off, could trigger a further acceleration to the downside.
After focusing primarily on the ninth consecutive drawdown as reported by the U.S. Energy Information Administration on July 20, traders appear to have gotten a wake-up on Thursday when they realized how big the gasoline supply had grown during the same time period.
The EIA reported a crude inventory drop of 2.3 million barrels in the week-ending July 15, however, total inventory remained near a historically high 519.5 million barrels for this time of the year.
More importantly, total U.S. crude and oil products stocks rose 2.62 million barrels to an all-time high of 2.08 billion barrels, as gasoline stocks posted a surprise build of 911,000 barrels, despite expectations that record numbers of Americans took to the road this summer amid cheap pump prices.
“Surprise” isn’t my word, but the word that has been tossed around in several news stories. The spread between near-term and future delivery prices, which reached its widest in five months, has been telling the story for several weeks.
So if “surprised” crude oil longs are finally realizing that there is a gasoline glut then look out below if they decide to start taking profits and perhaps flipping to the other side of the trade.
Weak product demand also showed up in the EIA’s distillate report with inventories jumping a whopping 4.2 million barrels.
Overall, we have a technically weak situation on the crude oil chart that is being caused by excessively high gasoline inventories. The rapidly approaching maintenance season is also a concern.
The September Crude Oil chart clearly indicates a weak market. The market is now down six weeks from its high at $52.73 the week-ending June 10 and in a position to drop even further.
The main trend is still up according to the daily swing chart used by longer-term traders. However, momentum is to the downside. The trend will actually turn down on a trade through $38.67.
The short-term range is $38.67 to $52.73. Its retracement zone is $45.70 to $44.04. This zone is currently being tested. After trying to establish support at the 50% level at $45.70, buyers finally threw in the towel this week, allowing the market to plunge towards the Fibonacci retracement level at $44.04.
The long-term range is $32.85 to $52.73. Its retracement zone and primary downside target comes in at $42.79 to $40.44. Since the trend is up and this is considered a value area to some, buyers are most likely to come in on a test of this area.
This week, sellers also took out a long-term Gann angle (Red). This is another indication of a shift in momentum since it is moving up at a rate of $.50 per week and has been guiding the market higher since the main bottom at $32.85 the week-ending January 22. Look for selling pressure as long as crude remains under this angle. It moves up to $46.35 next week.
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September crude oil is also trading on the bearish side of a steep downtrending angle (Blue) at $45.73 next week. This angle forms solid resistance with the 50% level at $45.70.
Traders should look for the strong downside bias to continue as long as September Crude Oil remains under $45.73. Momentum will shift to the upside if $46.35 is overcome.
If the selling pressure continues next week then look for a “stair-step” move to develop because of the Fibonacci level at $44.04 and the 50% level at $42.79. Traders will test each level, stop and try to establish a bottom then move on to the next level.
The biggest concern for long traders will be a breakdown under $42.79. This is because the next major target doesn’t come in until $40.44.
If crude oil continues to walk down the steep downtrending angle at $45.73 next week then we should see a test of $40.44 the week-ending September 2.