August WTI crude oil futures are testing the 45.00 handle resistance in today’s trading with the market brushing off the bearish EIA status report from Wednesday. In what has been over a $3.00 rally in front month crude prices (from the June lows), the EIA status report’s miss of forecasts for a 2.1 million barrel draw, and instead estimating a 0.1 million barrel build in inventories, has been completely brushed off by the market. While prices remain below the 45.00 resistance zone, I noted in last week’s article, that the path of least resistance is likely still lower towards a test of the 40.50 Fibonacci and technical confluence area in the continuous daily contract.
At this point, it would appear the market has also lost faith in OPEC’s ability to control supplies, as the cartels headlines are barely events anymore. As I have said before, talk is cheap, and while OPEC cuts have been made a reality, it’s clearly not enough of a consensus to empower the bulls. The continued talk and production of US shale has been out pacing the OPEC efforts to cut production, at least in the minds of traders and the market. The recent rally off the 42.00 level appears to be more profit taking than longs initiating long term positions, and it’s possible that there will be more participation from lower prices.
From a technical perspective, breaking below the May 43.76 lows from the continuous contract is massively significant. I discussed last week the same set of technical indicators that are driving the market lower, including two Fibonacci measurements, the lows from July of last year, and the channel the market has been holding the last 4 months. WTI crude futures should find a support level where there is a confluence of Fibonacci support bands (retracements and extensions) between 40.65 and 37.20 (daily continuous chart below). There is also a declining price channel, formed from the trend line against the 53.76 and 52.00 highs, and the trend line against the 47.09 and 43.76 lows. I expect the extension of this trend line support, which crosses the 50% Fibonacci retracement and 100% Fibonacci extension at the 40.65 area, to be tested and support the market in the near to medium term. Resistance comes in at the 45.00 area, but above 45.00 opens the door for a test to channel resistance into the 47.20’s. The only question we have to answer with crude: is just how high will this dead cat bounce?
Crude Light Daily Continuous Chart