This week the EIA Petroleum Status Report surprised the market with a massive -12.6 million barrel draw, plunging inventories to 405.2 million barrels (18.2% below their levels one year ago).  While the drop in inventory numbers are substantial, (and represents a fundamentally bullish report for crude prices) the over 5% selloff in WTI crude futures price is likely the result of “buy the rumor – sell the news” profit taking from technical price targets.  US refineries were operating at an incredible 96.7% of their capacity, slightly below last week’s capacity, but still near record levels.  Refineries operating at near maximum capacity means the demand for WTI crude may be nearing its highs as refineries are physically incapable of processing more crude.   At this time, the draw on inventories is more representative of slowdowns in crude oil production, as reprocessing levels have been running at near maximum levels for several weeks.  One final note, is that crude oil imports have also dropped form last week, suggesting that refineries and processors have slowed down their purchasing as well.  With all that taken into perspective, it seems clear that a slowdown in oil purchasing by processors translated into a near-term drop in crude prices.

From a technical perspective, momentum indicators showed a clear loss of upside momentum into the $75.00 technical price targets, and once a reversal began, reversed sharply and are now confirming a pullback is underway.  WTI crude prices found support into the $65.00 Fibonacci inflection zone, and while it remained above trend line support at $63.00, had technical upside price projections into the $76.00 area.  I mentioned this scenario as the path of least resistance in m previous articles, and the next logical progression of the trend is for a pullback to find the next supportive inflection zone.  The selloff in WTI crude prices the last few days has gotten a reaction from $69.34, a 50% Fibonacci supportive price level drawn from the June 18th low to July 3rd highs.  While the market remains above $67.50, this price level projects upside technical targets of $76.40 to $78.70 in the near-term.  Below $67.50 at this time, would suggest a retest of last support at $65.00 inflection zones, and below those levels the continuation of the current multi-week and multi-month uptrend may come into questions.

In my opinion, the rally that has taken WTI crude prices above the $66.66 continuous contract highs (into the end of 2017 and start of 2018) is still a very important “break out higher” indicator for the market.  The fight over trend seems to be all but won by the bulls, which has continued to take the market price higher since June of 2017.  The recent pullback is currently testing supportive price levels that suggest bulls are still buying this market in pullbacks to continue trends higher.  The trend is still up until it’s not, and I believe a break below the $64.22 price level would constitute a reversal at this time.  Technical upside targets were hit, which has resulted in profit taking from the $75.00 to $76.00 inflection zone, and the market has simply pulled back into its next supportive price level.  With WTI Crude prices above prior multi-year highs, the trend is up until it’s not (and I like to think, trend is my friend).  When a market speaks, you must listen, and WTI crude may be telling us this is the beginning of a much larger trend being born.

Crude Oil Daily Continuation Chart

Crude Oil Daily Chart

Dan Hussey