This week the EIA Petroleum Status Report surprised the market with a sizable -6.1 million barrel draw, taking inventories down to 404.9 million barrels (16.2% below their levels one year ago).  While the drop in inventory numbers is notable (and represents a fundamentally bullish report for crude prices) the price action in WTI crude oil futures has resulted in nearly $10 range over the last two months.  US refineries were operating at 93.8% of their capacity, which has slowed from near record production just a couple weeks ago.  While crude oil has been consumed week over week, the slowdown in gasoline production is indicative of potentially future builds in crude oil inventories, and may be counter acting the fundamentally price bullish consensus that this week’s drop in inventories suggests.

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, the market entered into a “finding support” mentality.  WTI crude prices found support into the $66.00 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 was for a pullback to find the next supportive inflection zone.  While the market remains above $63.74 (61.8% Fibonacci technical ‘line in the sand’), this price level projects upside technical targets of $76.40 to $78.70 in the near term.  Below $63.74 at this time, would suggest a retest of last support at $58.00 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 $63.74 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