Support Crumbles As Sellers Resume Control
By Jim Hyerczyk - Mar 20, 2015, 2:29 PM CDT
Crude Oil
Crude oil support fell apart last week, leading to a price collapse. The selling momentum was strong enough to drive the market into a new low for the year. Some traders are calling $40.00 support, but this is merely a psychological level. Based on the building of a bearish fundamental picture, it looks as if this market is headed a lot lower than $40.00. At this time, the price level is not as important as the chart pattern and the price action. And the chart pattern and price action indicate that sellers are in control and buyers are scarce.
Throughout all of February and some of March, hedge and commodity fund investors were giving the market the benefit of the doubt that a rally would take place because of the number of producing wells being shut down by the U.S. oil companies. They were also holding out hope that OPEC would begin to feel pressure to reduce production, but these scenarios never panned out. U.S. oil inventories continued to build and OPEC actually increased production as well as prices for U.S., Asian and European customers.
With production rising, all it took was the seasonal shutdown of refineries for maintenance and the switchover to spring and summer gasoline blends to reduce demand and raise inventories further. In addition, this created storage issues at the key Cushing, Oklahoma storage facility which led to it nearing full capacity. On top of this, contango pricing or the buying of nearby futures contracts and the sale…
Crude Oil
Crude oil support fell apart last week, leading to a price collapse. The selling momentum was strong enough to drive the market into a new low for the year. Some traders are calling $40.00 support, but this is merely a psychological level. Based on the building of a bearish fundamental picture, it looks as if this market is headed a lot lower than $40.00. At this time, the price level is not as important as the chart pattern and the price action. And the chart pattern and price action indicate that sellers are in control and buyers are scarce.
Throughout all of February and some of March, hedge and commodity fund investors were giving the market the benefit of the doubt that a rally would take place because of the number of producing wells being shut down by the U.S. oil companies. They were also holding out hope that OPEC would begin to feel pressure to reduce production, but these scenarios never panned out. U.S. oil inventories continued to build and OPEC actually increased production as well as prices for U.S., Asian and European customers.
With production rising, all it took was the seasonal shutdown of refineries for maintenance and the switchover to spring and summer gasoline blends to reduce demand and raise inventories further. In addition, this created storage issues at the key Cushing, Oklahoma storage facility which led to it nearing full capacity. On top of this, contango pricing or the buying of nearby futures contracts and the sale of higher priced deferred contracts failed to stop the price slide, indicating that the market was in the hands of strong sellers.
On March 19, crude oil spiked higher while producing a potentially bullish closing price reversal bottom because of a U.S. Federal Reserve monetary policy statement which triggered a steep drop in the U.S. Dollar. Since there wasn’t a follow-through move to the upside, this indicated that the rally was triggered by buy stops and short-covering rather than fresh buying. In other words, the weak shorts were knocked out of the market, giving the stronger short-sellers another opportunity to build their bearish position.
The current chart pattern indicates that there is plenty of room to the downside if $44.03 fails as support. If it holds then short-covering could drive the market back to at least $49.02. Since the main trend is down on the daily chart, short-sellers are likely to re-emerge at this price to initiate new positions and to defend the trend.
Other factors currently affecting the price of crude oil in a negative way are the nuclear talks between Iran and six major Western powers and the solidarity in OPEC.
Nuclear talks between Iran and other powerful nations are currently taking place in Lausanne, Switzerland. Since there are big changes being discussed, some sellers are backing away from pressing the market at this time. If a deal is reached then look for oil prices to weaken further since this should lead to the lifting of sanctions against Iran which could lead to the release of at least another million barrels into the global market.
This week, Kuwait oil minister Ali al-Omair expressed some concern about oil prices but said his nation would keep production steady since “We don’t want to lose our share in the market.” His comments sided with the words of officials from Saudi Arabia who reiterated this week that the cartel must remain united in its efforts to defend its output against U.S. shale producers and other non-OPEC nations.
Despite the slashing of U.S. oil exploration budgets and the reduction of producing oil wells, U.S. crude oil inventories continue to build because shale oil is still being produced. It looks as if prices are going to continue to trade lower until there are signs the shale oil production is slowing down.
Although there may be a short-covering rally over the near-term due to technically oversold conditions and the volatility by the U.S. Dollar, the chart pattern suggests the short-side is being defended by strong sellers so any rally is likely to be met with fresh shorting and repositioning for the next drive through the psychological $40.00 level.
