March Crude Oil futures continued to weaken the week-ending January 15 as the market continued to get hit from bad news on both the supply and demand side of the equation.
(Click to enlarge)
After finding support early in the week due to the relative calm in the global equity markets and renewed interest in higher risk assets, U.S. crude oil erased its gains after the U.S. Energy Information Administration released its weekly inventory report. The report showed that inventories of crude at Cushing, the futures market delivery hub, climbed to a record high and that gasoline and distillate inventories climbed more than expected.
According to the EIA, crude stockpiles in Cushing, Oklahoma, rose by 97,000 barrels in the week ending January 8. Total inventories of crude at Cushing climbed to a record high of 64m barrels.
Overall U.S. crude inventories rose by 234,000 barrels the previous week, smaller than the 2m barrels that traders had estimated. U.S. crude stocks rose to 482.6m barrels, keeping the inventory within striking distance of levels for this time of year not seen in the last 80 years.
Inventories of gasoline increased by 8.4m barrels in the week-ending January 8, following a 10.6m barrel increase the last day of 2015. The current increase was greater than the 8.4m barrel rise forecast by analysts.
The bearish report drove the expiring February Crude Oil futures contract below $30.00 for the first time in 12 years. In addition…
March Crude Oil futures continued to weaken the week-ending January 15 as the market continued to get hit from bad news on both the supply and demand side of the equation.
(Click to enlarge)
After finding support early in the week due to the relative calm in the global equity markets and renewed interest in higher risk assets, U.S. crude oil erased its gains after the U.S. Energy Information Administration released its weekly inventory report. The report showed that inventories of crude at Cushing, the futures market delivery hub, climbed to a record high and that gasoline and distillate inventories climbed more than expected.
According to the EIA, crude stockpiles in Cushing, Oklahoma, rose by 97,000 barrels in the week ending January 8. Total inventories of crude at Cushing climbed to a record high of 64m barrels.
Overall U.S. crude inventories rose by 234,000 barrels the previous week, smaller than the 2m barrels that traders had estimated. U.S. crude stocks rose to 482.6m barrels, keeping the inventory within striking distance of levels for this time of year not seen in the last 80 years.
Inventories of gasoline increased by 8.4m barrels in the week-ending January 8, following a 10.6m barrel increase the last day of 2015. The current increase was greater than the 8.4m barrel rise forecast by analysts.
The bearish report drove the expiring February Crude Oil futures contract below $30.00 for the first time in 12 years. In addition to the bearish inventory news, the price action was also dominated by concerns about the Chinese economy and the strength in the U.S. Dollar.
On January 12, the EIA issued its Short-Term Energy Outlook, which issued projections for 2017. According to the EIA, West Texas Intermediate (WTI) crude oil prices are expected to be $2/b lower than Brent in 2016 and $3/b lower than Brent in 2017.
The EIA also said that prices are likely to remain low as supply continues to outpace demand in 2016 and more crude oil is placed into storage. The EIA estimates that global oil inventories increased by 1.9 million b/d in 2015, marking the second consecutive year of inventory builds.
The bearish fundamental news is driving more hedge funds into the short side of the market. The problem that can arise is that there may not be enough room for all of them to continue to press the market lower. This makes the futures market susceptible to a possible closing price reversal bottom, or huge short-covering rally. So this essentially means that you should be careful about selling weakness too aggressively on new lows. It's not going to take much to get caught in a bear trap especially if nervous shorts are looking for any excuse to book profits.
According to recent data from the Commodity Futures Trading Commission, hedge funds are holding the least bullish positions in crude oil since 2010. Speculators' net-long position in West Texas Intermediate crude shrank 24 percent according to data as of January 5.
Looking at last week's price action, we saw that prices were particularly sensitive to actions taken by the People's Bank of China. These actions were confusing at times which led to uncertainty. During the first week of the year, the Chinese central bank was bent on weakening the Yuan. During the second week of the year, it calmed the markets by helping to boost the value of the Yuan.
There is no way to predict what they plan on doing next, but if they are concerned about the weakness in the economy and the volatility in their equity markets, they may take steps to solidify both with the announcement of a major stimulus package, similar to what they did in late August 2015.
The action in August 2015 helped put in a bottom in the crude oil market, at least temporarily. This is the main reason why we should be careful about pressing this market too hard at current price levels. Any aggressive action by the People's Bank of China will encourage some of the weaker hedge funds to actively cover their short-positions. This could then lead to speculative buying and the start of a powerful short-covering rally.
I'm not trying to pick a bottom at current levels, but I am sounding the alarm because I have a little bit of a contrarian inside me at this time. Simply stated, there seems to be too much bearish news piling up at this time just like the increased number of short positions by the hedge funds. The traditional fundamentals are likely to remain bearish for a long time, but from a trading standpoint, we could run out of sellers and this is what current shorts should be concerned about.
At the very least, if you are short, then know your exits before you initiate new positions, or you could become part of the panic buying that may be just around the corner.
Technically, the main trend is down, but the March Crude Oil contract did find support the week-ending January 15 at precisely the point we were looking at. After posting a low at $31.00 on a key downtrending angle, the market was driven away from this angle on profit-taking. At this time, the market is trading at $ 29.67, a close over $34.32 on Friday, January 15 will produce a weekly closing price reversal and this could set in motion the start of a 2 to 3 week rally.
The week-ending January 22, the key area to watch is a downtrending angle at $30.75 and a steep downtrending angle at $28.70. If this area is successfully tested and the market rebounds to the upside then this will serve as a sign that the buying is greater than the selling at current price levels. Once again the market will be set up for another potentially bullish closing price reversal bottom.
I will give up my search for a closing price reversal bottom on a sustained move under $30.70 the week-ending January 15.
In summary, the overwhelmingly bearish fundamentals and the huge short positions build by the hedge funds puts crude oil in a position to put in a strong enough bottom to produce a solid 2 to 3 week rally. We're not trying to pick a bottom, and would prefer to press the short-side lightly because the trend is down. However, if reversal bottoms start to show up on the daily and especially the weekly chart then I will be willing to cover everything and may even consider a speculative long position. I am slowly beginning to think a bit contrarian at current price levels because we all can't be right and too many analysts are calling for $20 crude oil. However, the price action and order flow will tell me when its time and China is likely to be the catalyst behind this market's turnaround.
