Oil futures swung from gains to losses throughout today’s session, but at the close, the bulls prevailed, as the contract for November delivery on the New York Mercantile Exchange ended the session with a 0.7% gain at $50.29 a barrel, recouping the majority of Monday’s loss. Today, a report from Reuters noted that OPEC’s secretary-general said that the group should be able to reach a deal next month to limit oil production without too much disagreement about individual countries’ output levels. Mohammed Barkindo also told journalists on the sidelines of the Oil & Money conference that Russia, which is not in OPEC, was not backtracking on its pledge to contribute to output limits should OPEC reach a deal at its next meeting on Nov. 30. “We expect that all the building blocks will be in place in a timely fashion for the implementation,” Barkindo told the conference, an annual London gathering of top oil officials and company executives. “I am optimistic we will have a decision,” he said.
Overall, however, the contract’s technical condition was unchanged as a result of today’s gain, as the oil futures remain in the midst of the consolidation phase that has been underway since the peak at $51.60 a barrel was established on October 10th. The consolidation phase is serving to ease the extreme overbought condition which developed as a result of the rally to the October highs.
Near term support is at the $49.15/$49.10 zone. Maintaining above this level would be considered a sign of strength and will keep oil futures well-positioned to resume the advance from the September low over the near term. On a drop below this support, additional chart-based support is minimal due to the steep trajectory of the advance underway since late September. Thus, Fibonacci retracements of the move from the September 10th low to the October 10th high will watched as potential areas where demand may come into play. A 38.2% retracement of the advance would push the contract for November delivery down to the $48.30 level.
A drop below first support could lead to a more protracted move to the downside in oil futures, given the absence of additional chart-based support and the sizable increase in long positioning by large speculators which took place as the contract advanced from the September low. The current net long position held by large speculators is 413,650 contracts. This is compared to a net long positioning of 278,873 contracts as of the September 20th close. Given the increase in long positioning, a sudden drop in oil futures could spark liquidations, thereby exacerbating the sell-off.
However, with first support still intact, the bias in oil futures is currently to the upside, with first resistance at the recent high at $51.60/barrel. The next-higher resistance is at the June 24th rally high at $52.00, followed by the June 9th high at $53.39. A sustained move above the $52.00/barrel level would confirm the completion of a head and shoulders bottom, as shown on the weekly chart. A confirmation of the pattern calls for a move beyond $70/barrel.
API data will be released later today, while weekly EIA petroleum inventory data will be released tomorrow at 10:30am ET.