Oil futures were higher in overnight trading after the American Petroleum Institute reported Tuesday that crude oil stockpiles declined by 3.8 million barrels after a build of 7.6 million barrels the week prior. The more influential weekly report from the U.S. Energy Information Administration then caused the contract for December delivery to surge to new rally highs in today’s session. EIA data showed an unexpected and large draw in crude oil inventories compared to consensus estimates. Specifically, crude oil inventories had a draw of 5.247 million barrels versus a consensus estimate of a build of about 2.7 million barrels. At 468.7 million barrels, U.S. crude oil inventories are near the upper limit of the average range for this time of year.
Oil futures rose sharply on the report. The contract for November delivery, which expires at Thursday’s settlement, rallied to $51.93 for a high on the New York Mercantile Exchange, the highest level since June. The contract for December delivery surpassed the October 10th rally high with a move to $52.22 a barrel and ended the session at $51.82, up 2.4%. Coming into play as a result of today’s advance is resistance defined by the late June rally high at $52.30/$52.40. On a break above this level, the target becomes the June peak at $53.62. The advance in oil futures boosted energy stocks, resulting in energy performing best among sectors, by a wide margin, in today’s trading.
As a result of today’s advance, December oil futures broke marginally above the neckline of a head and shoulders bottom that can be seen on the weekly chart. Sustaining a breakout at week’s end would confirm the bottoming formation. Measuring implications of the pattern call for an eventual move to approximately $71.00/barrel.
Open interest increased 4.8% in the advance from the September 27th close through the October 10th close. This was a bullish indication as it suggested new money entering the market drove the advance, rather than short-covering. A further increase in open interest reported for today’s advance would lend added support to the bullish case, thereby suggesting further gains are likely. The next Commitment of Traders report, which details holdings by large speculators, will be released on Friday. In last week’s report, it was noted that 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.
The consolidation that developed following the October 10th advance eased the resulting extreme overbought condition. The Stochastic however, a price momentum indicator, is now back at overbought levels as a result of today’s rally. Following through to the upside in the days ahead in the presence of this overbought condition would be considered a sign of internal strength.
Should the overbought condition lead to another period of consolidation, first support is at $51.00 followed by the more significant $49.70 level. Holding this level on another move to the downside would keep the overall trend biased firmly to the upside.
Baker Hughes rig count data will be released on Friday at 1pm ET. The next official OPEC meeting will be held in Vienna, Austria on November 30.