What Was Really Behind The Recent Oil Price Rally

The 6.3% rise in December Crude Oil on October 29 serves as a great example of just how starved the energy complex is for just a hint of bullish news. A number of reasons have been presented for the rally, but the best seems to be the old floor trader response to media questions, "there were more buyers than sellers."

Let's look at a few. Some traders say that prices began rallying within 30 minutes of the start of the regular trading session in New York. The early $1 jump in prices was attributed to a "big" algorithmic trade. No other details came out about the trade so I have to assume that this may be the new generation of electronic traders' way of saying "there were more buyers than sellers."

The weekly U.S. Energy Information Administration (EIA) report also contributed to the rally. It reported that crude stockpiles rose 3.4 million barrels for the week-ended October 23. This number matched analyst forecasts, but the build was less than the 4.1 million build posted the day before by industry group the American Petroleum Institute (API). This begs the question, do the EIA and API reports ever "line up?"

I would believe that traders were looking for more bearish information and got a bullish report, but the EIA report was neutral. If it were bullish then, based on the volatility created by the news, crude prices would've rallied 10 to 12 percent by conservative estimations.

An even better explanation for the price surge was the inventory drop of 785,000 barrels at the main delivery hub for U.S. crude futures at Cushing, Oklahoma.

The greater-than-expected drawdown in stockpiles of gasoline and distillates (diesel and heating oil) offered an even better reason for the rally. These futures contracts posted 5 percent gains on Wednesday shortly before contract expirations on Friday.

Finally, shortly before the end of the session, crude oil futures received an additional boost following the Federal Reserve's somewhat hawkish monetary policy statement.

To put it all in perspective, an e-trader saw an opportunity to take advantage of a low-volume, low-volatility market and bought crude oil with both hands. This probably led to copy-cat buying once the regular session opened because sometimes, traders play follow-the-leader. Because of the increased bidding, the neutral report turned into a bullish report because the buyers wouldn't go away. Finally, the Fed put a cherry on top of the whole rally by issuing a surprisingly hawkish report that generated a volatile reaction in all the markets.

From a technical analyst's perspective, the market was oversold, which is another way of saying it ran out of sellers. This basically confirms what floor traders have been telling us for years that markets go up when there are more buyers than sellers.

Stripping out all of the fluff that took place earlier in the week and looking at only the EIA data, its latest report was only neutral-to-mildly bullish. Until a drawdown trend develops, bearish traders are likely to continue to sell rallies. Expectations are that inventories should continue to build over the near-term.

In addition, I don't expect the market to move too far away from the mid-point of its recent range going into OPEC's important meeting on December 4. This means we could be looking at another four weeks of sideways to lower trade with a few volatile short-covering rallies mixed in just for flavor.

(Click to enlarge)

Looking at the Weekly December Crude Oil chart from a long-term and short-term perspective, we can observe the following.

The long-term ranges are $65.38 to $39.22 and $63.12 to $39.22. Their 50% levels are at $51.11 and $52.30. The most recent top at $51.42, the week-ending October 9, fell between these levels. Trend traders aren't even going to turn bullish until this area is taken out with conviction.

The short-term range is $39.22 to $51.42. Its key retracement area is $45.32 to $43.88. After holding as support for eight weeks, sellers took out this area, driving the market to $42.58 this week. Enough buyers came in at this price to trigger a rally back above the retracement zone. This move even put the market in a position to post a weekly reversal to up.

Over the near-term and barring any spectacular surprises, December Crude Oil is likely to remain inside the $39.22 to $51.42 range with most of the trade taking place between $45.32 and $43.88.