Technicals Not Fundamentals Will Drive A Turn In The Oil Markets

Crude oil futures plunged to a 6 ½ year low this week, setting in motion a sell-off in unleaded gasoline and energy stocks.

The week started with crude oil holding steady after last week's break. On Tuesday, the American Petroleum Institute (API) provided some support when it reported that crude oil inventories fell by 2.3 million barrels in the week ending August 14. Traders were looking for a decrease of 1.2 million barrels.

The API also reported that gasoline inventories decreased by 1.5 million barrels.

Support disappeared on Wednesday, however, following the release of the weekly petroleum inventories report by the U.S. Energy Information Administration (EIA) for the week-ending August 14. This report showed U.S. commercial crude inventories increased by 2.6 million barrels last week. This held total commercial crude inventory at 456.2 million barrels.

According to the EIA, total gasoline inventories decreased 2.7 million barrels last week. The figure helped maintain inventories in the middle of the five-year average range. Total motor gasoline supplied was up 6.5% compared with the same period a year ago. The EIA news, however, didn't convince bullish investors to maintain their long positions.

October Crude Oil

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Technically, sellers were able to maintain their bearish stance with another lower-high and lower-low on the weekly chart. The market also continued to walk down a trend line moving down $2.00 per week since the $62.65 top the week-ending June 12.

This week, the trend line provided resistance at $42.65 with the market making a high at $43.38 before falling below the trend line. Next week, the trend line drops in at $40.65. If crude oil is going to continue to remain weak then it will have to continue to trade below this trend line.

A sustained move over $40.65 next week and especially a close over this trend line will suggest a short-term bottom is forming.

October Unleaded Gasoline

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Despite the greater-than-expected decrease in supply, October Unleaded Gasoline futures buyers couldn't support the market after holding it in a range the past two weeks. The selling pressure was strong enough to take out the 1.3974 main bottom formed the week ending January 16.

This market continued to walk down a down trend line from the 1.8979 main top, moving lower at a rate of .04 per week since the week-ending June 19. This week, the trend line comes in at 1.4979. Continue to look for lower prices as long as October Unleaded Gasoline futures remain under this angle. Crossing to the strong side of this angle and closing above it will signal the formation of a short-term bottom.

Monthly S&P Select Energy SPDR ETF (XLE)

The bearish news hitting the crude oil market also drove energy stocks lower this week. The monthly S&P Select Energy SPDR ETF approached its multi-month low reached on August 6 at $66.29. If downside momentum continues then this price is also likely to fail. The primary target at this time is the June 2012 bottom at $61.11.

The only salvation this month for the XLE ETF would be a close over $69.38 on August 31. 

The surprise drop in gasoline prices also drove down Exxon Mobil (XOM) after two weeks of consolidation. Its weekly chart indicates that the bottom the week ending November 25 at $73.90 is the next likely downside target.

Conclusion

The chart formations on both the weekly and monthly charts indicate that crude oil, unleaded gasoline and energy stocks remain under tremendous pressure. The fundamentals are likely to take time to develop so if there is a turn in these markets then it is likely to be technically based. The best sign of a short-term bottom remains the closing price reversal bottom. However, crossing to the bullish side of the down trend lines in the crude oil and gasoline markets are also likely to give the market a slight upside bias.