September Crude Oil futures reached a new low for the year this week as persistent oversupply issues continued to feed the bear market. There appears to be no letup in sight for the resilient U.S. and OPEC production.
Recent U.S. Energy Information Administration crude oil inventory data for the week-ended July 31 was actually friendly, but it was not impressive enough to scare short-sellers out of the market. The report showed a drawdown of 4.4 million barrels, much better than the estimated 1.3 million barrels.
Two factors offset the bullish news: an increase in stockpiles of gasoline and other finished products and a rise in daily U.S. oil production.
Shale oil producers continue to flood the market with oil at a tremendous rate. Lower production costs are helping these producers to move oil at a superior rate to their competitors. U.S. production rose last week by 52,000 barrels a day to 9.5 million barrels a day.
Worries about China’s economy and the possibility of a stronger U.S. dollar because of an expected Federal Reserve interest rate hike in September are also weighing on demand. Furthermore, we’ve hit the peak of the summer demand season which will likely mean crude oil demand will drop further into the fall. With fundamental support dropping, prices are expected to continue to feel pressure.
Iran is also shaking up the markets as its oil minister has vowed to ramp up production once the sanctions against the country are lifted. Iran plans to use new foreign capital to rebuild and modernize its oil facilities which could lead to a huge jump in production which would further add to the global supply glut.
Technically, the main trend is down according to the weekly swing chart. The market is far from turning the trend to up, but conditions are ripe for a potentially bullish closing price reversal bottom. Unfortunately, this week it would have to close over $47.12 to produce such a pattern.
Last week, the market was forming this type of bottom at the time the article was being produced, but the pattern fell apart on Friday when Baker Hughes, Inc. announced another increase in the rig count. This week, there is going to have to be surprise news that produces close to a $3.00 rally late in the session on Friday, or the market is going to finish at its low for the week. This will give the crude oil market a downside bias at the start of trading next week.
Additionally, the market is following a steep downtrending angle from the $62.51 main top. This angle, moving down at a rate of $2.00 per week, has been guiding prices lower since the week-ending June 12. It comes in at $44.51. Crossing back over to the strong side of this angle next week, will signal a slowdown in the selling pressure. This could lead to a change in momentum which would be the first sign of a bottom because it would suggest that the buying is greater than the selling at current price levels.
Instead of looking for a particular price to stop the break, it is suggested that aggressive counter-trend traders pay more attention to the chart pattern after a new low is reached. It may not get you the exact bottom, but it will at least let you know when the momentum shifts back to up.
In other words, prices may be relatively cheap, but trying to pick a bottom is too difficult because of the relentless selling pressure. If you are looking to enter on the long-side or trying to find an excuse to take profits, wait for a low to be reached then enter/exit when the momentum turns back up. It is suggested that you think about selling weakness and buying strength, not vice-versa.