January crude oil futures reached a five-month low this week, however, oversold conditions and technical support points stopped the slide, putting the market in a position to post a potentially bullish weekly closing price reversal bottom. Although the fundamental picture still indicates the presence of supply concerns, the price action seems to be suggesting that the market is stabilizing, making it ripe for a potential short-covering rally.
This week, the market was hit by two bearish oil inventory reports. On Wednesday, the American Petroleum Institute said that U.S. crude inventories rose by 600,000 barrels last week. On Thursday, the U.S. Energy information Administration reported that crude supplies rose more than expected the previous week. Crude oil supply was up 2.6 million barrels for the week-ended November 8. Analyst estimates were looking for supply to rise by 1.8 million barrels.
These reports suggest the potential for further downside action, but the market stopped going down. Although technical traders will cite oversold conditions and chart points for the developing rebound, something else may be helping to put in a bottom and that something may be the rising spread between Brent and crude oil contracts. Currently, this spread stands at $14.93 a barrel, the widest since April 2013.
Brent oil prices were well-supported in recent trading sessions amid growing concerns over a disruption to supplies from Libya and after talks aimed at curbing Iran’s nuclear program broke down over the week-end. So while crude inventories may continue to rise, it is highly unlikely that Brent oil would rise without taking crude oil with it.
Traders should watch the relationship between these two contracts to gauge whether the crude oil contract has enough buyers to continue to underpin prices. Once the spread stops widening, January crude oil is likely to resume its downtrend as investors return to the normal fundamentals.
The technical picture lays out this way this week and next. A close over $94.95 on November 15 will form a potentially weekly closing price reversal bottom that could launch the start of a two to three week rally.
This week support was reached on an uptrending Gann angle at $93.08. Next week, this angle moves up to $93.33. Holding this angle is important to the structure of the market. Besides the closing price reversal bottom, a close over the Fibonacci level at $94.12 will also be a sign of developing strength.
On the upside, the first resistance is a downtrending angle at $96.94 the week-ending November 15 and $95.94 the week-ending November 22. These points are followed by a 50% level at $96.76.
It is possible the market will stabilize inside the major retracement zone at $94.12 to $96.76, however, the weekly chart clearly shows tremendous upside potential if $96.76 can be taken out with conviction. Taking out this level will be the goal of the bullish traders. It may have to take a combination of aggressive buying and short-covering to drive through this price level.
On the downside, the entire bullish scenario will be wiped out if buyers can’t hold $93.33. If this angle breaks then look out below especially if the market loses support of the Brent/Crude Oil Spreaders. This spread must continue to widen if sentiment is going to turn bullish.