News Continues To Stoke Oil Market Volatility

Despite another week of increased inventories and the possibility that Iran will agree to a nuclear deal, May Crude Oil futures posted an inside move and slightly better close. The inside move indicates impending volatility and the slightly better close could be indicating that there is a slim chance that a deal with Iran will not be struck or that the situation between the Saudis and the Iran-backed rebels in Yemen will escalate.

That's it in a nutshell. The better-than-average volatility during the week and the two-sided trade suggest exactly what a close at or near a 50% level is telling us. That is, the market is being controlled by trader indecision.

It has to be hard for bullish traders to commit to the long side with inventories reaching a record high for the 12th straight week, but the sideways-to-higher price action suggests there are some out there. According to the U.S. Energy Administration's supply and demand report for the week-ended March 27, crude inventories rose 4.8 million barrels to 471.4 million. Analysts were looking for an increase of 4.2 million barrels.

Crude stocks also rose at the Cushing, Oklahoma delivery hub. The latest reading showed an increase of 2.7 million barrels to 58.9 million. This added to concerns that this hub will soon reach full capacity.

The EIA also reported that gasoline stocks fell 4.3 million barrels, more than four times what was expected. Analysts were looking for a 943,000-barrel drop. The move represented a huge jump in demand which could translate into greater demand for crude oil within a few weeks.

Crude oil did rally shortly after the release of the EIA numbers despite the increase in supply, but some traders blamed an oil platform fire in the Gulf of Mexico for the price jump. Others said the possibility of a break down in the talks between Iran and other nations was the catalyst for the 4% rally.

Since a decision regarding Iran is likely to be reached before next week's EIA report, trader focus should be on this topic until then. Despite having its self-imposed deadline reached on March 31, the talks kept going into Thursday. Reaching a nuclear pact between Iran and several global powers could have a bearish impact on crude oil prices because it could put millions of barrels of additional Iranian crude onto an oversupplied global market.

Iranian Foreign Minister Mohammed Javad Zarif said "significant progress" had been made at the talks, but as of Thursday, nothing concrete has been decided. Based on the price action, traders aren't sure when or if a decision will be reached ahead of the long week-end. It does suggest, however, based on the inside trading range for the week, that the reaction will be volatile.

While the possibility of an Iran nuclear deal grabbed most of the headlines this week, some traders were still expressing concerns about the conflict between the Saudis and the rebels in Yemen. The initial bombing seems to have done its job, but there is strong talk that the next move will have to be on the ground. So far there has been no discussions of any U.S. involvement.

One of the objectives of the military action is to put the government back in order. Another is keeping the oil supply transit routes open. As mentioned in last week's article, the key transit area that must be kept clear is the Bab el-Mandeb Strait. The closure of this transit area could prevent oil tankers from the Persian Gulf from reaching the Suez Canal and blocking the quickest route for tankers from North Africa to Asia.

With Saudi Arabia vowing to do "anything necessary" to eliminate the rebels, this could turn into a long-term military event. However, it is not going to make oil prices go up unless there is a direct threat to the supply.

The sell-off from the previous week's high suggests that speculators have already begun reducing positions and short-sellers are not that afraid after the initial bombing. Nonetheless, the inability to break the market this week could be an indication that speculative buyers are more interested in establishing support rather than chasing prices higher. 

The chart pattern on the weekly chart reflects exactly what the fundamentals are saying especially since the market is nearly straddling a 50% level at $50.05. Simply stated, overcoming then sustaining a move over this level will indicate strength. If enough upside momentum builds then buyers may take a shot at the $56.08 top. A trade through this level will turn the main trend to up on the weekly chart.

A failure at $50.05 will indicate that investors believe the rebels in Yemen pose no threat to supply. Look for a sharp break if the Iran deal is struck since this will mean more supply will hit the global market.

Fundamentally, an Iran nuclear deal and an easing of tensions in Yemen will be bearish for crude oil. A failure to reach an agreement and an escalation of tensions will be bullish. Technically, it all comes down to investor reaction to $50.05. This is the key pivot price that will dictate the direction of the next major move.