Fundamental Forecast for USOIL: Neutral
Talking Points:
- Oil market demand structure exposed as Hurricane Harvey exposes refinery risk
- Gasoline spread volatility shows concern is focused on oil products over oil output in W. Texas
- Per BHI, US Oil Rigs falls by 4 rigs. Rig count drops by 4 to 759 active US oil rigs
- IGCS showing increase in retail long oil positions, contrarian view favors further price drop
A complex charting pattern is aligning with a hurricane hurling toward the Texas coast, and traders seem confused. Take heart, it’s OK, and you’re not alone. A key driver of Oil demand has been refiners, which are aligned alongside the Gulf Coast of Texas (where this poor boy vacationed as a young man). Refineries have been preparing this week for a Tropical Storm turned Hurricane by limiting refining activity, which is reducing much of the demand seen in the Oil market. Friday’s EIA Crude Oil Inventory Report showed that U.S. Oil inputs (refining activity) are at record levels with a comfortable margin (~600,000bpd).
The production aspect of Oil in Texas is in West Texas, far and away from the hurricane. Additionally, Oil production is not expected to slow down where we could see a mismatch once again between supply, which is steady, and demand that is dropping as refiners prepare for the first hurricane of Harvey’s strength to hit Texas in 13 years.
Could Hurricane Season alter the outlook for Oil? Click here to see our Q3 forecast on what outcomes we're watching!
Now, on to the charts. We’ve been watching last week’s extremes to anticipate where price will likely move. Last week’s low of $45.38 and last week’s high of $49.13. A break below $45.38 would open up a chart pattern known as a corrective triangle. The correction would be from the move from $50.20 to $45.38. A break below $45.38 would favor an eventual move to the lower $40/bbl zone where Oil consistently has found support. A break above $49.13 would invalidate this view. Until $49.13 is broken, I will now look lower as demand could be broken by Harvey sending gasoline prices higher, and Oil’s price lower. A temporary effect to be sure as these markets are often correlated, but traders should be on the watch for short-term Oil weakness if more refiners are taken offline than previously expected.
Crude Oil price may be triangulating near trend defining support of $45.38/bbl, anticipated lower
Chart Created by Tyler Yell, CMT
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Saturday: Hurricane Harvey forecasted to come onshore near Corpus Christi
- Tuesday 4:30 PM ET: API weekly U.S. oil inventory report
- Wednesday 10:30 AM ET: EIA Petroleum Supply Report
- Friday (Time uncertain): North Sea Brent loading program for October
- Fridays 1:00 PM ET: Baker-Hughes Rig Count at
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
Crude Oil IG Client Sentiment Highlight: Contrarian view suggests further drop in price
Oil - US Crude: Retail trader data shows 67.5% of traders are net-long with the ratio of traders long to short at 2.07 to 1. In fact, traders have remained net-long since Aug 14 when Oil - US Crude traded near 4785.9; price has moved 0.6% lower since then. The number of traders net-long is 14.3% higher than yesterday and 5.9% higher from last week, while the number of traders net-short is 15.2% lower than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil - US Crude prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bearish contrarian trading bias (emphasis added).
-TY
