Crude Oil Technical Analysis

While OPEC may be winning in their battle to balance the global Oil market, it is not necessarily happening on the timeframe they would prefer. Naturally, it is not helpful that Shale production is at its highest levels since 2015. The U.S. Shale resurgence coupled with OPEC’s supply management continues to provide hope for Oil bulls. While Crude dropped ~3% on Wednesday, there is also likely to be volatility on expiration-position squaring is occurring as May WTI contract expires Thursday.

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Now that crude oil prices have bounced from $43.79, the Elliott Wave model suggests sideways to higher trade in the coming weeks. The two favored patterns we are following right now is a big triangle or diagonal pattern.

X Wave Triangle
Under this triangle scenario, prices would need to top soon and below $55.21. If a short term pivot forms, we would anticipate one last dip to hold above $43.79 to finish off the triangle pattern. This is an overall bullish pattern that would lead to a break higher. This triangle is valid in the near term so long as crude oil prices are contained between $43.79 and $55.21.

Diagonal Pattern
Under this scenario, the dip to $43.79 was wave four of the five wave diagonal. This sequence implies crude oil prices have begun their ending wave higher. This final wave likely grabs a new high above $57 while holding the green support trend line.

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Crude Oil price rose for the fourth consecutive day on Tuesday that provides hope that we could see a long overdue mean-reversion move. The fourth consecutive daily rise in price would be the first in a month, and traders will look to inventory data on Wednesday from the EIA for validation that draws are persisting despite the rise in supply. On Friday, traders were met with the 23rd week of an increase in activated oil rigs in the US per Baker Hughes International, but the sellers did not control the day.

From an Intermarket Analysis perspective, the price of Crude Oil may have further support as the US Dollar took a dip against the EUR as ECB President; Mario Draghi shared a positive outlook and took EUR/USD above 1.13 for the first time this year. While a weaker USD could help, it is worth noting that Oil is likely retracing after working on the worst performing June since 1988.

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Inventories did see a bump higher, but the jump was +0.1% while Cushing, Oklahoma inventories (the largest delivery stock in the US) fell for the sixth straight week. A cause of concern that was raised on Wednesday was a Dallas Fed Survey showing Oil executives expect supply to remain abundant relative to demand until H2 2018.

There are two developments in the oil market that you should consider that could precede an aggressive move higher as the calendar shifts to H2 2017. First, ICE Futures Europe data shows short positions in Brent are at their highest levels since record keeping began in 2011. While this does not immediately indicate a rally, a further move higher in oil prices would likely encourage a violent short-covering rally though resistance from $48-$50/bbl is expected to hold.
Bears tend to be very impatient traders so that a move higher in the price toward month’s end could bring a strong snap back that could leave short traders wanting to cover and start fresh in July. Second, per IGCS, a definitive rise in short positions and pull back in longs is developing (second chart below). We typically take a contrarian view of crowd sentiment, and recent changes in sentiment warn that the current Oil - US Crude price may soon reverse higher despite the fact traders remain net-long.

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Safe to say that OPEC gatherings are about to get a shade more uncomfortable. On Monday, rumors leaked that Saudi was likely to ask that Libya and Nigeria to cut production as their increased production was overshadowing the intended positive effect of Saudi’s cuts. However, reports from Bloomberg have stated that Saudi Arabia itself is reporting to OPEC officials that they pumped 10.07 million bpd in June up from 9.88m in May and exceeding their limit for the first time since the production curb deal they helped broker. Either way, the minimal excess production will likely give Libya and Nigeria reason to state they were justified in overproduction due to high summer demand, but we continue to be a ways off from the hoped for Shock and Awe to scare markets to bid Oil higher.

One “positive development” is the dying off of legacy rigs in the shale regions that have been responsible for so much production in the last few years. The main argument is that legacy, or older oil wells are relatively expensive to maintain and to produce less than their recently completed and funded counterparts. A retiring of legacy wells could eventually lead to significant production decline at an overall lower cost, but it’s fair to say the this may not come as soon as OPEC and other stakeholders in the energy industry hope.

The EIA report that shows new production and legacy decline illustrates that 300-400k bpd is needed from new rigs to help offset retiring legacy rigs. I would argue that as oil stays at depressed levels, projects that had been approved or planned to be implemented will come offline, which over time could help balance the oversupply issue. However, this is not a quick fix, though a natural one, and could mean aside from a ‘Shock & Awe’ moment, we could be in for an early winter in terms of bullish crude oil prospects.

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On Wednesday, after the EIA released the data that Crude Inventories declined by 4.73m barrels and that Saudi was delivering less crude, holding true to their comittment may act as a force for higher prices. Of course, as we continue to see in Friday’s Baker Hughes data, UUS production continues to push higher and acts as a road block for a significant price recovery. However, as we see increased gasoline demand (+2.1% YoY), a weaker USD and an overall supportive report from the EIA, it’s worth it to keep an eye on the charts to see if a breakout could be in the works.

There are a handful of technical highlights to watch for that would act as catalysts for a Bullish recovery if the price exceeds. First, the opening range high for the 2nd half of 2017 (first two weeks of July) sits $47.29, Second, the combination of the daily Ichimoku Cloud and Bearish price channel (downward sloping – red) align near $48.20-$47.50. Lastly, the 61.8% Fibonacci Retracement of the May to June range rests at $48.20. A break above the zone $47.29-$48.20 on a daily closing basis should be watched to combine with a desperately awaited Oil recovery.
While the dots may be in place to be connected, it’s worth noting that without a price recovery, these points mentioned above (Saudi cutting back on US exports, increased Gasoline demand, 4.7m barrel inventory draw), remain unfulfilled anecdotes to a Bullish thesis. Lastly, we have seen a strong move off long-term support, which could also show that should a break above $48.20 develop, a base may be set. Maybe. A reversal lower from resistance would turn attention back to long-term support at $43.50/42 per barrel.

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Like a snowball rolling downhill, the Crude Oil market is beginning to gain valid arguments for a Bullish breakout. Recently, we’ve focused on the export (as opposed to production) curbs that have been agreed to in St. Petersburg by Saudi Arabia and the UAE. On Wednesday, we saw Oil climb still further on tangible proof that the supply glut is shrinking through a drop in crude, gasoline, and distillate inventories with overall petroleum inventories in the US sitting at their lowest levels since early 2016 per Bloomberg.

One should note the seasonal tendency for energy markets to favor upside breaks in the summer. This tendency was made apparent from the one-week average gasoline consumption rising 2.4% toward the record high set in late May.

The headline EIA print showed a decline of 7.2m barrels last week in US crude stockpiles, which was nearly double the expected decline. Naturally, this market remains demand heavy, which is playing well this time of year, but the DOE data showing a running 4-week average of total petroleum products supplied high 21.2m barrels per day, which was the highest supply level seen since early 2008. You could argue that given the draw in stockpiles, that is a rather bullish development in showing that demand is hitting record highs too, and I would favor that argument as well, but demand will need to keep pace with supply if this recovery in price is to have legs.

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Crude oil prices have been range bound for the past year between $39 and $55. The model we are following suggests continued consolidation between these two price points over the coming months.

This triangle pattern is valid so long as this current rise is contained under the 2017 high of $55.21 while holding above the June 2017 low of $42.08. Therefore, we are anticipating a dip to begin from slightly higher prices. This dip could work itself back towards the mid 40’s. This triangle pattern as labeled is a bullish triangle. Once the triangle pattern exhausts, we are anticipating a bullish breakout to above $55.21. Therefore, since the consolidation appears to be a pause of the previous uptrend, trend traders may want to follow a buy the dip strategy.

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Crude oil looks ready to rally higher, according to shorter term technical analysis. Last week’s low looks to be a strong point of support from Elliott Wave analysis, which holds a potential count where last week’s low was the end of a Bullish Correction. Once a correction is over, trader’s should look for moves higher that can be traded.
When looking at the fundamental picture, it’s worth noting the good, the bad, and the troublesome.

First, the good was that US stockpiles fell for the eighth straight week on rising demand led mainly from refiners. Refiners are processing more oil than last year in the US by 60,000 bpd. Aligning with the end of the likely seasonal peak is the potential of the first Gulf Coast Hurricane, currently named Tropical Depression Harvey, to hit Texas since 2008. However, we could see a direct hit effect refiners more, which are laid across the Gulf and are a key demand point of Oil. There was a strong amount of Latin American Imports coming mainly from Venezuela as well as impressive US gasoline exports that were near 700,000 and at the highest since June. The troublesome point is that seasonality is nearing its likely cycle peak that could mean we are about to see a seasonal drop, which could lead to a stall in the aggressive draws of inventory.

As mentioned above a breakdown below last week’s low at $45.38/bbl would favor a further breakdown is upon us. However, if we can see a move above last week’s high at $49.13/bbl would be strong since not seen since the last week in July that we’re breaking above resistance from the 2017 downtrend, which could mean we’re about to see a retest of $50/bbl. If such a move is going to happen, this time of year is a good fundamental time for it to occur.

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Are you confused why Oil is trading lower after an encouraging EIA Crude Oil Inventory Report that showed a draw of 5.39m barrels and had refiners processing 1m bpd more than last year’s record refining activity? In a word, or name, Harvey is why Oil is trading lower, and you can see the confusion through derivative markets such as time spreads of Oil and the Brent/ WTI spread.

Either way, the supply chain component of the energy market that was hurt by Harvey was refiners. What you need to know is that refiners were the demanding so much Oil from producers that the massive amount of production, the production that has thwarted OPEC’s best-laid plans to bring global stock pils back to the five-year average, and now that demand is stemmied. Even last week, as evidence was building that hurricane Harvey was going to be a force unlike Texas and refiners along the Gulf of Mexico had seen in a while, refiners were processing record amounts in order to put as much into inventory as possible for when they may be forced offline for prepares.

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