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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Mixed Signals Have Oil Traders On Edge

Last week’s report ended with a call for a sideways trade with the crude oil market holding between $55.33 and $50.95. September Crude Oil futures traders accommodated by posting a range of $53.94 to $51.44. The price action formed an inside move which typically means trader indecision.

Trader indecision may have been caused by a technically oversold market, or the lack of fresh news. Coming off the previous week’s Greek bailout vote and the crash in China’s equity markets, this week’s news was pretty tame. Iran signed a nuclear deal with several western powers, but that seems to have been priced into the market. This left reliable supply and demand as the key influences on this week’s price action.

This week, the U.S. Energy Information Administration (EIA) reported that total crude stocks fell the week-ended July 10. The catalyst behind the drawdown was record refinery runs. Crude inventories fell 4.3 million barrels to 461.42 million, compared with trader expectations for a decrease of 2.0 million barrels.

Despite the greater-than-expected drawdown, oil prices broke on the news because the EIA numbers were far less than the reading by the industry group the American Petroleum Institute (API). Its report showed a 7.3 million barrel decline. Perhaps the large discrepancy should be added to the list of reasons for trader indecision.

Obviously, the EIA numbers were better-than-expected, but not as bullish as the API figures. However, hidden inside the EIA report was the news that crude stocks at the Cushing, Oklahoma delivery hub for crude oil futures rose 438,000 barrels. This was yet another factor that could have contributed to trader indecision.

The EIA also reported that U.S. crude imports rose by 38,000 barrels per day to 6.78 million barrels per day.

If we look at the data closely, we can conclude that overall inventories fell, but inventories at Cushing rose while imports also increased at a noticeable clip. This, for the most part, negated the drawdown in the API and EIA reports that were the result of the high refinery utilization rate and the increased demand from refiners for crude oil. Maybe this was the main reason for this week’s indecision and sideways to lower trade.

(Click to enlarge)

Technically, crude oil futures ended the week lower. The inside move on the weekly chart suggests impending volatility. The main trend is down on the weekly swing chart with the next target the $49.69 main bottom from the week-ending March 20.

Also putting a bearish spin on the market was another weekly close under the retracement zone at $55.33 to $57.07. Both of these levels are resistance this week.

Volatility is likely to pick up next week after this week’s inside move. Taking out $50.95 with conviction could trigger a spike into the contract low at $49.69. If the selling momentum is strong enough, we may even see a new low for the year. On the upside, a move through $53.94 will likely trigger a few buy stops, but gains will be limited by $55.33.

Unleaded Gasoline Futures

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September Unleaded Gasoline futures continued to sell off this week, but the selling pressure subsided as the market neared a key 50% level. The main trend is down on the weekly chart. The trend turned down last week when the market traded through the swing bottom at 1.8677. This price is new resistance.

Although the main trend is down, short-sellers should watch for a possible technical bounce on the first test of the 1.7974 to 1.7291 retracement zone. This should be considered normal technical price action and may not even be related to fundamental news. It typically indicates profit-taking or short-covering.

A technical rebound will be normal, but overcoming the previous bottom at 1.8677 will indicate that the short-covering is getting a little more serious. This typically occurs when selling pressure dries up. When the funds stop selling, the market usually reverses up in order to shake out the weaker shorts and give the funds a better price to initiate new shorts.

If sellers take out the 50% level at 1.7964 with conviction then there may be a spike down to the 61.8% level at 1.7291. This is also a potential trigger point for an acceleration to the downside.

The direction of the unleaded gasoline market next week is likely to be determined by investor reaction to the 50% level at 1.7974. Holding above this price will indicate that the buying is greater than the selling at current price levels. Taking it out with conviction could trigger a sharp sell-off into 1.7291.

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