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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Time For Some Optimism

April Crude Oil futures are poised to close higher for the week after posting a strong recovery, following last week’s sell-off. Technically, the picture is clear, but the fundamentals continue to remain cloudy.

AprilCrudeChart1

Technically, the weekly chart paints the most bullish picture. Firstly, this chart is still finding support because of the closing price reversal bottom at $44.37 from the week-ending January 30. This chart pattern was confirmed when the market traded to $55.05 the following week, but since then crude oil has tested both sides of a retracement zone at $49.71 to $48.45. Trader reaction to this zone is likely to set the tone for the next few weeks. The week is likely to end with an upside bias since the market is trading on the bullish side of this zone.

If traders can build a support base at $48.45 to $49.71, then the greater the possibility of a continuation of the rally becomes. The longer the support base, the more upside potential since it is often said that “the height of the market is determined by the length of the base”.

The weekly chart also indicates there is plenty of room to the upside. Give the break from $99.53 to $44.37, the first upside objective remains $71.95. This is a pretty optimistic target, however, which means bullish traders are going to have to get help from the fundamentals.

AprilCrudeChart2

A failure at $47.80 and a sustained move under this level could trigger a retest of the main bottom at $44.37. Support under $44.37 is unknown under this level.

Despite another spike in U.S. weekly supplies, crude oil was able to establish a slight upside bias this week. According to the U.S. Energy Information Administration, crude oil inventories rose by 10.3 million barrels for the week-ended February 27. This exceeded analyst forecasts of 3.7 million barrels. Traders called this the biggest build since 2001.

As expected, the market sold-off on the inventory news, but was able to bounce back after a successful test of the technical support zone and on friendly comments from the Middle East. Saudi Arabia said it would increase its selling prices for its Arab Light crude oil for consumers in the U.S, Europe and Asia in April.

Also helping to support the market was an upbeat speech from Saudi Arabia’s Oil Minister Ali al-Naimi. He said in a speech that oil “demand is gradually rising, global economic growth seems more robust and the oil price is stabilizing.”

Demand may have helped to stabilize the crude oil market, but there are still some concerns about oversupply. Since the market did not sell-off to new lows with the rise in oil stocks, traders must be focusing on other relevant data. This is likely the reduction in the number of producing oil rigs and some growing support from commodity and hedge funds. Traders should consider this short-term support however.

If the reduction in the number of producing rigs doesn’t start to put a dent into supply then aggressive traders will try to regain control. This could kill the rally and trigger the start of another drive lower. For weeks, oil investors have been making money by taking advantage of the difference between the current price of oil and the price for delivery in future months. For example, an investor can buy crude oil at $52.00 today and sell it for $61.00 a year from now, locking in a profit after paying for storage for twelve months.

While this has proven to be a profitable investing strategy, it has also raised concerns about the direction of crude oil prices if the market runs out of storage space. If overproduction continues and the arbitrageurs run out of storage space then this could trigger a resumption of the down trend.

The good news, however, is that gasoline supply dropped more than expected for the week-ended February 27. This is a sign of greater-than-expected demand. If demand for gasoline begins to pick up then the same should occur for crude oil. This will likely take care of the need for more storage and likely lead to the start of a drop in crude oil stocks.

This is a very optimistic outlook, but it is being supported by the price action so at this time we have to believe that this is the scenario that bullish hedge and commodity fund investors expect to develop.




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