What’s Behind The Bounce In Oil Prices?
U.S. West Texas Intermediate crude oil futures are trading at their highest level since September 17 on Friday. The market is also in a position to finish about 1.30% higher for the week. That’s a pretty impressive number because just two days ago, crude oil was trading about 7% lower.
This week’s whip-saw price action has been fueled by renewed concerns over a U.S.-China trade deal, which weighed on demand growth, a bearish American Petroleum Institute (API) weekly inventories report, followed by a bullish U.S. Energy Information Administration (EIA) weekly inventories report, and a jump in expectations that OPEC and its allies would extend their production cut program.
US-China Trade Deal Confusion
Risk sentiment has seesawed all week amid mixed signals on whether Washington and Beijing can work out at least a partial deal to end trade-related tensions between the world’s two largest economies.
Earlier in the week, President Trump said the United States would raise tariffs on Chinese imports if no deal is reached with Beijing to end the trade war.
On Thursday after a report in the South China Morning Post said the United States could delay tariffs on Chinese imports even if a deal has not been reached by December 15, when tariffs kick in on goods including electronics and Christmas decorations.
Separately, Chinese Vice Premier Liu He, also the chief trade negotiator, said he was "cautiously optimistic” on a phase one deal, according to a report by Bloomberg.
At the end of the week, traders didn’t know if the talks had reached a stalemate over the rollback of tariffs, or whether the U.S. had accepted an invitation from China to resume face-to-face talks in Beijing.
U.S. Energy Information Administration Weekly Inventories Report
On Wednesday, the EIA reported U.S. crude stocks rose by 1.4 million barrels in the week to November 15, compared with expectations for an increase of 1.5 million barrels. It was also significantly lower than the 6 million barrel gain that the American Petroleum Institute (API) data showed late Tuesday.
Crude stocks at the U.S. futures delivery hub of Cushing, Oklahoma fell by 2.3 million barrels. The EIA also reported a 1.9-million barrel build in gasoline inventories for the week before, and a decline of 2.5 million barrels in distillate fuel inventories.
Additionally, the EIA said refineries last week produced 10.1 million bpd of gasoline, down from 10.2 million bpd a week earlier. Distillate fuel production averaged 5.1 million bpd, compared with 5 million bpd a week earlier. The average crude oil processing rate last week was 16.4 million bpd, compared with 15.9 million bpd a week earlier.
Late Tuesday, the API reported a crude oil inventory build of 5.954 million barrels for the week-ending November 14. Traders were looking for a 1.543 million barrel build.
While most traders agreed that the EIA numbers matched the estimates, the big draw at Cushing lit the fuse for a huge short-covering rally.
Reuters: OPEC+ to Extend Production Cuts
Crude oil futures surged more than 2% on Thursday following a Reuters report that OPEC and its allies are likely to extend output cuts until mid-2020. There was no mention of whether they would deepen the cuts in production. Nonetheless, the price action clearly indicates that traders liked the news. The decision will be made at the OPEC meeting on December 5-6.
In my opinion, a decision to extend the cuts in output will be reached because of the uncertainty over the timing of the trade deal. This is OPEC+’s safety net. If the trade talks break-off then OPEC and its allies will probably agree to deepen the cuts at some point in the future.
Technical Analysis
Weekly January West Texas Intermediate Crude Oil Technical Analysis
Weekly Trend Analysis
The main trend is up according to the weekly trend indicator chart. Over the past seven weeks, the market has clawed back more than 62% of its September to October sell-off.
Since that sell-off was blamed by the tit-for-tat tariff war between the U.S. and China, we can conclude that the current rally is being fueled by renewed optimism that a trade deal will be reached over the near-term.
Furthermore, bullish traders have been betting on an extension of the OPEC-led supply cuts since Saudi Arabia mentioned the possibility of deeper cuts in October.
The nearest upside target on the swing chart is the main top at $61.48 from the week-ending September 20. That price was hit shortly after the attacks on the Saudi crude oil production facilities.
The minor trend is also up. A new minor bottom has been formed at $54.85. A trade through this bottom will change the minor trend to down. This will also shift momentum to the downside.
The main range is $72.64 to $45.44. Its 50% to 61.8% retracement zone comes in at $59.04 to $62.25. This zone is controlling the longer-term direction of the crude oil market. It stopped the last two rallies at $61.49 and $60.26.
On the downside, the first minor support comes in at $56.09. The main support zone is $54.89 to $52.66.
Weekly Forecast
Based on this week’s price action, the direction of the January WTI crude oil market the week-ending November 29 is likely to be determined by trader reaction to the main 50% level at $59.04.
Bullish Scenario
A sustained move over $59.04 will indicate the presence of buyers. If this move is able to generate enough upside momentum then look for the rally to possibly extend into the main top at $61.48, followed by the main Fibonacci level at $62.25.
Bearish Scenario
A sustained move under $59.04 will signal the presence of sellers. If this move creates enough downside momentum then look for a pullback into the minor 50% level at $56.09.