Crude oil futures followed through to the upside this week, confirming the previous week’s potentially bullish closing price reversal bottom. From the fundamental side, the catalyst behind the rally was speculation that oil producers would discuss potential action to stabilize oil prices during a meeting next month in Algeria.
The comments came at a perfect time when the market was technically oversold. Based on the price action, it appears the news gave short-sellers an excuse to book profits, leading to the powerful short-covering rally. One could also build a case for fresh longs returning to the market since the rally started inside a major retracement zone also known as a value area.
In addition to the comments from Saudi Arabia’s energy minister Khalid al-Falih that fueled the strong rally on August 11, the market also received support from a new outlook published by the International Energy Agency (IEA) that said it expected the supply and demand balance to tighten towards year-end also supported prices.
Finally, from the bullish side of the equation, news of a drop of 8.1 percent in China’s oil output in July, to a five-year low of 16.72 million tons also boosted prices because it implied that Asia’s biggest economy has to import more crude.
Bearish traders cite two key reasons why the current rally is not likely to last. Firstly, the crude oil glut still exists and secondly, in order to be bullish, there would also need…