RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

After a mild draw on US inventories of -1.6 million barrels in this week’s release of the EIA Petroleum Status report (compared to a 1.8 million barrel increase last week) the fundamental story for WTI crude seems to be that producers are matching consumption at a fairly close rate.  The looming pressure “from above” in oil prices is the ability for US production, particularly from the Dakota and Oil Sands, to increase production.  When WIT crude prices first broke above $60, the initial reports of previously halted production in these drilling areas started, and are now coming back online.  This is in response to the favorable prices, which have made oil sands operations profitable again.  I have talked extensively in the past on why the $60 to $65 price per barrel threshold is significant for multiple stakeholders and producers in the global crude oil complex.  Other than the supposed level US oil sands producers need to keep production profitable, this is also the price which Brazil was speculated to have used in the past  for the budgeting and accounting of the for their national budget plan.  The final fundamental supply side improvement, is the return of the Keystone Pipeline to service.  After the incident that resulted in a mild oil spill and a shutdown of the pipeline supply, WTI crude inventories simply had a harder time getting replenished.

The fundamental reason there may be a high in oil for the short term, also has the potential to confirm a technical reversal lower.  While there is no reason to call for a confirmed “top is in” just yet, it would be irresponsible to not consider a situation where oil could trade to the lower $50.00 area, before trading higher.  While a Fibonacci support zone has already provided a bounce from the $58.00 inflection zone (blue boxes on chart), and the ball is in the bull’s possession, the market has a high probability to continue to trade in a 66.00 to 58.00 range.  Upside technical targets from $58.00 could take the WTI crude price to the $68.00 to $70.00 objectives, but there is also the potential for much larger supportive technical areas to the downside to trade as well.  Below the $58.00 inflection zone, are the $54.50 trend line and Fibonacci 100% extension inflection zone, as well as the much larger $46.36 full 50% Fibonacci retracement inflection zone.  Either of these supportive areas would be logical downside targets if the price of WTI crude breaks lower.

In my opinion, the rally that took WTI crude prices to the $66.66 continuous contract highs into the end of 2017 and start of 2018 is taking a mild pause.  Fundamental supply and drilling ramp ups, along with the return of the Keystone Pipeline, are reason to believe there is healthy and ample supply in crude inventories to keep prices capped.  Of course there are black swans that could change this dynamic in a second (i.e. war in the Middle East, or a shutdown of the Keystone Pipeline again), but it’s important to remember a market’s ability to remain irrational for longer than your account can remain positive.

Crude Oil Daily Continuation Chart


Dan Hussey