Oil Markets Still In The Hands Of The Short Sellers

November Crude Oil

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Fundamental Analysis

After a lackluster start, November Crude Oil futures are in a position to finish the week higher, buoyed by a surprise inventory drawdown. A weaker U.S. Dollar ahead of the September 17, Federal Reserve monetary policy statement also helped underpin prices. A strengthening labor market was also supportive.

The futures market traded mostly sideways as many of the major players took to the sidelines ahead of the Fed statement. This led to a weaker trade early in the week, driven by below average volatility and volume. Volatility returned to the market on September 16 after the release of a bullish weekly inventories report from the U.S. Energy Information Administration. The report also showed the largest crude drawdown in 7 months at the major U.S. hub in Cushing, Oklahoma.

According to the EIA, total U.S. inventory dropped 2.1 million barrels for the week ended September 11. Speculators and traders were looking for an increase of 0.7M to 1.2M barrels.

Although the report was able to trigger a 5.75 percent rally, gains were limited because of concerns over the global supply glut, mixed supply/demand outlooks from the EIA, the IEA and OPEC and an unexpected build in gasoline and distillate stocks.

Speculators did provide some support in reaction to reports confirming that U.S. Special Operations Forces troops are now on the ground in Syria assisting Kurdish Forces in their fight against the Islamic State and other insurgents. Additionally, reports of Russian troop activity in Syria are also attracting speculative interest.

Technical Analysis

Technically, the market remained range bound, capped by the high from two weeks ago at $50.04 and a pair of 50 percent levels at $50.69 and $51.77 and supported by a short-term retracement zone at $44.28 to $42.91.

The market is currently trapped between a pair of retracement zones. This indicates trader indecision. It also suggests impending volatility as investors wait for fresh news.

Bullish traders are likely betting on a trend to develop, which indicates U.S. production is declining. They may also be holding out hope of a production cut by OPEC before its December 4 meeting. Finally, bullish speculators may be increasing positions in anticipation of an escalation of the fighting in the Middle East, now that Russia is involved.

The inability to rally indicates that the market is still being controlled by the strong hands of the short-sellers. They aren't likely to budge unless hit by a major reduction in U.S. production or a surprise cut in OPEC output.

November Unleaded Gasoline

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Fundamental Analysis

November Unleaded Gasoline futures are expected to finish the week lower after the EIA reported an unexpected inventory build.

According to the EIA, total gasoline inventories increased by 2.8 million barrels the week-ended September 11 and are now in the upper half of the five-year average range. Total motor gasoline supplied averaged about 9.2 million barrels a day for the past four weeks, up by 2 percent compared with the same period a year ago.

Technical Analysis

Technically, the main trend is down according to the weekly swing chart. The main range is $1.8573 to $1.1966. The major resistance and possible upside target is its 50 percent level at $1.5270.

The short-term range is $1.1966 to $1.4775. Its retracement zone is $1.3371 to $1.3039. This zone was tested for the third straight week, however, as this week's EIA report was bearish enough to drive the market through the lower end of the retracement zone, at least temporarily. This move suggests the selling pressure is beginning to build.

A sustained move under $1.3039 will indicate that sellers have regained control. Holding above $1.3371 will indicate that sellers may not be willing to short at current levels and are playing for better prices. In other words, this week's news was not bearish enough to encourage traders to sell weakness.

Summary

The focus remains on the short-term retracement zones formed by crude oil and unleaded gasoline. The inability to break these areas with conviction and sustain the move, suggests that sellers are not willing to short weakness, or there may be a big speculative buyer supporting the markets on the dips.

Continue to look for sideways price action and a two-sided trade until there is a major development that shakes up the crude oil and gasoline markets enough to drive them out of their short-term ranges.

Last week, gasoline looked like it was ready to crack first. Another larger-than-expected build in gasoline inventories could finally trigger a big enough break to drag crude oil down through its own support zones.