Despite the previous week's potentially bearish chart pattern, July Crude Oil futures managed to trade higher most of the week. The key number which held as support was the previous week's low at $59.09. A trade through this level would have confirmed the top at $63.62. This would have set into motion a potential correction into $55.54 to $53.63.
Last week's inside move suggests trader indecision. However, it also indicates impending volatility. While the previous week's move may be indicating the emergence of potentially bearish fundamental news, last week's inability to follow-through to the upside or downside suggests that investors may be waiting for more information about the supply and demand conditions before choosing a direction.
On May 6, July Crude oil reached a top at $63.62 before breaking for two days into $59.09. The news of the first inventory drawdown since November may have fueled the surge into the high, but it was the higher-than-expected gasoline inventory figures that triggered the sell-off.
The news was bearish enough to cause a short-term break, but it was not enough to trigger the near-term correction that many investors have been anticipating. This indicates that investors are waiting for further direction from the fundamentals.
On May 13, traders received more conflicting inventory data which held the market in check for another day. According to the U.S. Energy Information Administration, U.S. commercial crude inventories…
Despite the previous week's potentially bearish chart pattern, July Crude Oil futures managed to trade higher most of the week. The key number which held as support was the previous week's low at $59.09. A trade through this level would have confirmed the top at $63.62. This would have set into motion a potential correction into $55.54 to $53.63.
Last week's inside move suggests trader indecision. However, it also indicates impending volatility. While the previous week's move may be indicating the emergence of potentially bearish fundamental news, last week's inability to follow-through to the upside or downside suggests that investors may be waiting for more information about the supply and demand conditions before choosing a direction.
On May 6, July Crude oil reached a top at $63.62 before breaking for two days into $59.09. The news of the first inventory drawdown since November may have fueled the surge into the high, but it was the higher-than-expected gasoline inventory figures that triggered the sell-off.
The news was bearish enough to cause a short-term break, but it was not enough to trigger the near-term correction that many investors have been anticipating. This indicates that investors are waiting for further direction from the fundamentals.
On May 13, traders received more conflicting inventory data which held the market in check for another day. According to the U.S. Energy Information Administration, U.S. commercial crude inventories decreased for a second consecutive week by 2.2 million barrels for the week-ended May 8. This was potentially bullish news because it may be an indication of a developing trend.
Concerns about the pace of the drawdown may have raised concerns, however, because crude oil did not rally above the previous week's high on this news. Instead, investors shifted their focus on total U.S. commercial crude inventory of 484.3 million barrels. This figure shows that inventory is still at its highest level for this time of year in at least 80 years.
The EIA report also showed that total gasoline inventories decreased by 1.1 million barrels last week. This was enough to stem talk of a bearish inventory trend although it also meant that inventories are still well above the upper limit of the five-year average range.
The inside move on the price chart and the mixed fundamentals suggest that something will have to give this week. The chart pattern suggests impending volatility and next week's crude oil and gasoline inventories reports will likely be the catalysts for an expanded move.
Next week, bullish traders will be looking for another decrease in crude oil and gasoline inventories. This will be the best case scenario because it will show there is demand for gasoline. Increased demand for gasoline will likely mean that refineries will increase demand for crude oil.
The market could turn bearish if crude oil or gasoline inventories show an increase. Although U.S. oil companies have reduced production, it is not having a major effect on total inventories. Furthermore, the global supply situation also remains relatively high since OPEC doesn't appear willing to reduce production. Some traders estimate that there has to be at least a 1.5 million barrel per day reduction in production to balance the market, but this is not likely to occur because U.S. production cuts have been marginal and not enough to offset the steady increase in production by OPEC.
Next week's price action will be triggered by the next EIA report on Wednesday, May 20. Technically, the market could head lower if $59.09 fails as support. If this occurs then the primary downside target becomes $55.54 to $53.63.
Bullish inventory news will likely create enough upside momentum to takeout the reversal top at $63.62. This move will likely be driven by aggressive speculative buying and buys tops. It may be enough to set the market on a path towards its upside objective at $72.42 to $78.30.
Traders will have to be patient while July Crude Oil remains inside $59.09 to $63.62. Once traders decide on direction, either level should be taken out with conviction. A successful breakout will be determined by the size of the volume behind each move and the inventory story which fuels the move.
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