Crude Oil Outlook
April Crude Oil futures failed to follow-through to the upside this week and are likely to finish the week lower. Although the market briefly penetrated last week’s high, it remained inside the range formed the week-ending February 6. Consecutive inside moves on the weekly chart typically indicates impending volatility. This assessment makes $55.05 the potential breakout level to the upside and $47.47 the potential breakdown level. Remaining inside this range will indicate trader indecision.
Crude oil is currently being controlled by two factors, the fund traders and supply. Aggressive hedge and commodity funds are looking for any excuse to trigger a breakout to the upside, but the bearish supply fundamentals continue to prevent this move from taking place.
The fund traders probably want out of their short-positions because they see the upside potential of a solid short-covering rally. It is difficult to assess the downside potential of the market because the target numbers being tossed around at this time like $25.00 or $10.00 crude oil don’t seem to be realistic. They may be more comfortable with the “known” rather than the “unknown”.
Looking at the daily chart, the “known” objective is the 50% level at $61.06. Although the market recently stopped breaking at $44.37, the next potential support level is basically “unknown” since traders aren’t sure if it will come in…
Crude Oil Outlook
April Crude Oil futures failed to follow-through to the upside this week and are likely to finish the week lower. Although the market briefly penetrated last week’s high, it remained inside the range formed the week-ending February 6. Consecutive inside moves on the weekly chart typically indicates impending volatility. This assessment makes $55.05 the potential breakout level to the upside and $47.47 the potential breakdown level. Remaining inside this range will indicate trader indecision.
Crude oil is currently being controlled by two factors, the fund traders and supply. Aggressive hedge and commodity funds are looking for any excuse to trigger a breakout to the upside, but the bearish supply fundamentals continue to prevent this move from taking place.
The fund traders probably want out of their short-positions because they see the upside potential of a solid short-covering rally. It is difficult to assess the downside potential of the market because the target numbers being tossed around at this time like $25.00 or $10.00 crude oil don’t seem to be realistic. They may be more comfortable with the “known” rather than the “unknown”.
Looking at the daily chart, the “known” objective is the 50% level at $61.06. Although the market recently stopped breaking at $44.37, the next potential support level is basically “unknown” since traders aren’t sure if it will come in pennies or multiple dollars below this level.
Although crude inventories continue to build week after week, short-sellers still aren’t sure when the reduction in producing rigs will eventually curtail this. The weekly Energy Information Administration report was bearish because the amount of crude in storage continues to grow. At this time, traders know the drop in rig counts will eventually have an impact on supply but they don’t know when this will occur.
The current trading pattern shows that the market has been dropping immediately after the oil inventories report then strengthening after the U.S. rig-count numbers are released on Friday. There is no reason to suspect this chart pattern will change despite the release of the bearish inventory report.
The chart pattern on the daily chart suggests that traders are still responding to support. If this holds true this week then buyers are likely to come in to support the market on a retracement into $49.71 to $48.45. The likelihood of this occurring this week will be increased if the rig count report on February 20 shows another steep decline.
If the market continues to trade lower despite a drop in the rig count then traders will have to assume there is another bearish factor driving the market lower. This could be increased production from Saudi Arabia for example.
Earlier this week, energy consultancy PIRA said that production from Saudi Arabia rose to about 10 million barrels per day. Since June, the world’s largest producer averaged about 9.7 million barrels per day so the increase to 10 million barrels per day is a strong sign that Saudi Arabia and OPEC are standing firm in refusing to do anything to support prices.
Just when traders were trying to figure out when the cut in U.S. output would begin to stabilize production and supply, the move by the Saudi’s will force them to redo the math. Although on paper this may sound bearish, the charts indicate it may just cause more uncertainty. This could lead to a sideways, range bound trade next week.
To recap the chart pattern and what it means, consider these scenarios. The current range is $44.37 to $55.05. A breakout over $55.05 will likely trigger an acceleration into $61.06. Fundamentally, it will mean that traders believe the rig count is declining fast enough to offset current U.S. production and the increased Saudi Arabian production.
If the market stays in the range and straddles $49.71 to $48.45 then this will indicate that traders are content with the cutback in U.S. production, but worried about the Saudi Arabian production.
A failure at $48.46 and a sustained move under this level will indicate that U.S. producers are not cutting production fast enough to offset the higher production in Saudi Arabia.
In summary, the tone of the market will likely be determined by this Friday’s rig count and how investors react to the retracement zone at $49.71 to $48.45.
