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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Short Covering Halts Oil Price Rout

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are in a position to close lower for the week, but a rally on Friday is helping traders claw back some of those losses.

Crude oil has been under pressure for more than two weeks as concerns over supply were outweighed by renewed worries over demand. These worries were elevated this week because of weaker-than-expected U.S. economic data. At the start of the week, oil traders were expressing confidence in the U.S. economy, but are now worried that the slowing global economy has reached the U.S. shores.

Contributing to the early weakness was a larger-than-expected build in U.S. crude inventories according to a government report on Wednesday. This surprise news drove prices sharply lower because it followed a report from the American Petroleum Institute (API) on Tuesday that showed an unexpected drawdown. This created uncertainty for traders.

Prices were also being pressured by the news that Saudi Aramco had restored full oil production and capacity to the levels they were at before attacks on its facilities on September 14. However, perhaps slowing down the selling pressure were reports showing production declines in the United States, Russia and OPEC.

U.S. Energy Information Administration Weekly Inventories Report

On Wednesday, the EIA reported an inventory build of 3.1 million barrels for the week-ending September 27. Analysts were looking for a build of 2.4 million barrels.

The EIA also reported a 200,000-barrel decline in gasoline stockpiles, which compares with a 500,000-barrel rise in the previous week. Distillate inventory was down 2.4-million barrels.

The API reported late Tuesday a large crude oil inventory draw of 5.92 million barrels for the week-ending September 26. Traders were looking for a 1.567 million barrel build.

The divergence between the API and EIA reports was expected because the attacks on Saudi production on September 14 probably skewed the data. The differences could be reconciled with a week or two.

Economic Data Producing Two-Sided Trade

Crude oil prices were hit hard on October 1 after a weaker-than-expected ISM Manufacturing PMI report fanned the flames of recession. Later in the week, the losses were extended after the ISM Non-Manufacturing PMI report came in below expectations.

Crude oil is trading higher on Friday following the release of a solid U.S. jobs report. The news helped ease concerns over lower demand due to a U.S. recession.

Conclusion

The short-covering rally on Friday is impressive, but it’s too early to call it a change in trend. Some technicians are calling the markets oversold after a relentless 13 session sell-off.

Some traders are saying sellers lightened up on the short side as the markets approached their August bottoms. Nonetheless, the fundamentals are bearish and the markets are not in a position to change the trend to up at this time.

Despite Friday’s turnaround, the markets remain on track for large weekly losses on fears that a global economic slowdown will hurt demand. This week’s price action clearly shows that supply issues took a backseat to demand worries.

We could further short-covering ahead of the week-end as some traders may choose to take protection against geopolitical events in the Middle East.

Furthermore, optimistic traders may decide to lighten up on the short side or take speculative long positions ahead of the start of U.S.-China trade talks on October 10-11.

Technical Analysis

Weekly November WTI Crude Oil Technical Analysis

(Click to enlarge)

The main trend is up, but momentum is clearly to the downside. A trade through $50.48 will change the main trend to down. Buyers would have to take out $63.89 in order to signal a resumption of the uptrend.

The short-covering on Friday suggests buyers came in to defend the trend against the $50.48 main bottom.

The minor range is $45.05 to $65.23. The market is currently straddling its retracement zone at $55.14 to $52.76. The recent price action indicates that this zone is actually controlling the short-term direction of the market.

The main range is $73.52 to $45.05. Its retracement zone at $59.29 to $62.64 is potential resistance.

Weekly Forecast

Based on this week’s price action, the direction of the November WTI crude oil market the week-ending October 11 is likely to be determined by trader reaction to $52.76.

Bullish Scenario

A sustained move over $52.76 will indicate the presence of buyers. If this creates enough upside momentum then look for the move to extend into $55.14. This price is a potential trigger point for an acceleration to the upside with $59.29 being the next near-term target.

Bearish Scenario

A sustained move under $52.76 will signal the presence of sellers. This could lead to a test of $50.48. Taking out this level will change the main trend to down. This could trigger an acceleration to the downside with the eventual target the December 24, 2018 main bottom at $45.05.



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