Crude oil started off last week’s trading on a down note, as traders appeared to be focusing on increasing US oil production following the report released January 27 from US oil driller Baker Hughes regarding the latest oil rig count. The contract for March settlement on the New York Mercantile Exchange fell more than 1% on Monday as the oil rig count rose to its highest level in about 14 months.
However, support was found on Tuesday at the $52.24/barrel level, and oil futures have since advanced, ending the week at $53.81/barrel, a gain of just over 1% from the prior Friday.
Last Wednesday’s session saw the most volatility, as oil prices reacted to the latest crude oil inventories reports. The American petroleum Institute (API) reported inventory data for the week ending January 27 on Tuesday after the bell. The report showed a build of 5.83mn barrels, compared with an expected build of around 3.30mn barrels and following a 2.93mn increase the previous week. Gasoline inventories recorded a build of 2.86mn barrels following an increase of 4.85mn barrels the previous week while distillate recorded a build of 2.27mn barrels after a build of 2.95mn the week prior.
Volatility picked up on the release of the more influential inventory report from the US Energy Information Administration (EIA) on Wednesday at 10:30 ET. The EIA reported crude oil inventories had a build of 6.5 million barrels, versus consensus which called for a build of about 3.289 million barrels. Gasoline inventories had a build of 3.9 million barrels versus consensus which called for a build of 0.982 million barrels. Distillate inventories had a build of 1.6 million barrels.
While oil prices fell in reaction to the build in inventory, the March contract rebounded ahead of the close of pit trading on Wednesday in reaction to news out of the White House. White House Advisor Michael Flynn, in regard to Iran’s the recent ballistic missile launch, stated that Iran’s activities continue to threaten the US, friends and allies in the region and he is “officially putting Iran on notice.”
The recovery continued into Thursday lifting prices to a high for the week at $54.34/barrel. This high was then tested on Friday after the Trump administration’s implementation of new sanctions against Iran, as the sanctions raised concerns about disruptions to supply and exports. This news was enough to override another increase in the US oil rig count.
On Friday, Baker Hughes said the active number of oil rigs rose strongly for a third week in a row, jumping by 17 to 583 for the week ending February 3. The total is now the most number of rigs online since the week of October 23, 2015, where the count stood at 594. The number of gas-only rigs held steady at 145. This brings the total number of active oil and gas rigs to 729, an increase of 17. The total count is now higher by 158 from a year-ago, while the oil-only is in positive territory over the same time period by 144 rigs.
Overall, however, the conflicting factors impacting oil prices have not resolved the current range-bound state of the commodity. In recent weeks, a floor has been provided by expectations for a reduction in supply due to the production cuts by the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members. While rallies have been capped over concerns of rising US oil production, as evidenced by the increasing oil rig count.
The end result is that oil prices have been locked in a sideways trading range that dates back to mid-December, when the March contract peaked at $56.24/barrel. Since then, no upside progress has been made, yet a solid floor has been established at $51.60/barrel. These levels define the current trading range.
First resistance within the trading range, defined by the January 12/17 highs near $54.30/barrel, is in play heading into next week. These highs correspond to a 61.8% Fibonacci retracement of the decline from the January 3rd rally peak to the January 10th corrective bottom. A close above this level is required to suggest a return to the January high is possible.
Additional minor resistance ahead of the January high stands at $55.20/barrel, defining the high established January 6. A sustained close above the $56.24/barrel level, however, is required to improve the longer-term outlook for oil prices.
The lower boundary of the current trading range is defined by the January 10th corrective bottom at $51.59/barrel, which represents a test of the corrective bottom established December 7/8 at $51.80/barrel. The decline to $51.72/barrel on January 18 and subsequent bounce also served to reinforce this area of support.
A close below this support zone would be an intermediate term bearish development for oil prices, as such a move would suggest the trading range dating back to December represents a broad topping formation. The target derived from the topping pattern is at $47/barrel, in the same vicinity as the next level of clear support on the daily chart at the November 29th low at $46.62.
Technically, crude oil prices appear to have broken out of what appears to represent a complex head and shoulders bottom on the weekly chart. However, since the breakout from this pattern, the contract has been unable to produce any meaningful upside follow through, calling into question the pattern’s validity. And the positioning of large speculators and commercial traders remains a concern.
According to the latest Commitment of Traders (COT) report from the Commodity Futures Trading Commission (CFTC), large speculators are at a record level of net long positioning, while commercial traders are at a new record level of short positioning. The COT report, released Friday with data as of the January 31 close, indicates large speculators increased their net long positioning by 10,169 contracts, bringing their total net long position to a new record high of 492,692 contracts. At the same time, commercials, or large hedgers, increase their net short positioning by 11,198 contracts, leaving them with a new record short position of 509,138 contracts.
The current levels of positioning by large speculators and large hedgers surpasses that which was held in June 2014, when crude oil futures peaked over $107/barrel and proceeded to crash from that level to below $28/barrel by January 2016. With the current positioning even more extreme than that which preceded a crash in prices of more than 70% from peak to trough, the probabilities appear to favor an eventual downside resolution of the current trading range and the potential for protracted decline in oil futures.
With overbought conditions a factor and the contract up against resistance, the bias heading into next week is to the downside with the potential for a retest of the lower boundary of the trading range. Minor support above the bottom of the range stands last week’s low at $52.24/barrel.
In the coming week, crude oil inventory data from the American Petroleum Institute will be released Tuesday after the bell. This will be followed by the EIA’s weekly crude oil inventories report on Wednesday at 10:30 ET. The weekly Baker Hughes oil rig count will be reported Friday at 13:00 ET. Also on Friday, the US International Energy Agency will release is latest oil market report. This will look at production in the global oil market. The report should indicate whether OPEC is sticking to its production cut plan and if US oil production is increasing.