The price of crude oil has been rebuilding since it broke down from highs of around $75 at the beginning of July. There didn’t seem to be much of a fundamental case for the pullback, but then there doesn’t need to be in today’s speculatively-driven markets. Even a huge 12.633M draw on US inventories announced by the U.S. Energy Information Administration (EIA) on 11th July managed to spark a subsequent 5% dive in the commodity’s price – explain that!? Perhaps it was ‘sell on news’ mentality, after all, the drawdowns don’t get much larger than that.
The regular volatility is partly caused by weekly announcements by the EIA and (to a lesser extent), the American Petroleum Institute (API). Wild swings in the presented figures are common due to the way the data is calculated. It can be tricky to get a handle on the real state of play, but it seems at least for now the oil market is reasonably balanced. Potential macro triggers are of course always threatening to bolster both bullish and bearish cases. Arguably the two major factors being potential political unrest causing supply disruption and a slowdown in economic growth stunting demand.
Let’s get to what really matters, the technical analysis! Crude oil has been moving steadily in an upward channel (grey) for over a year. It’s also wrapped in a longer-term channel (shown in purple). Over the summer, price action moved into a tightening falling wedge pattern (black) before a sharp pull down saw a test of the bottom of the grey channel. This also neatly coincided with a test of the 200 Day Moving Average (DMA). The move turned out to be a bit of a ‘fakeout’ with crude subsequently going on to rally back up and out of the wedge pattern as if it was a bullish reversal. The rally abruptly met resistance at $71.45 last week with the level strongly rejected.
The pullback has been short-lived though, with crude appearing to find a decent level of support around $66.90. With both the channel bottom and the 200 DMA trailing just below this area, it should continue to hold, unless there are any nasty real-world surprises. A trend line (dotted) made from the year high of $75.4 and September high of $71.45 form the next resistance front for crude once it regains a position over its 50 DMA.
The Relative Strength Index (RSI) shows a decision on sentiment is brewing with it continuing to coil. There’s seems to be sufficient RSI headroom now for crude to revisit its July high, but a fundamental trigger will likely be needed to break higher and open up the next target zone of $78-80.
As ever, all oil speculators will have their popcorn ready for tonights API announcement, as well as the main event tomorrow when the EIA releases its inventory figures.