Last week’s action was rather mixed as oil prices rallied off the starting gates to a 5-week high at 4883 on speculation of further OPEC cuts, but then turned sharply on Wednesday’s DOE inventory reports to post a low for the week at 4209. The report showed an unexpected increase in inventories of +749k bbl vs. the estimated draw of 250k bbl. Additionally, U.S. fuel consumption dropped 3.5% to a 2-month low at 18.9 million bpd. Thursday’s action reversed yet again off a better than expected U.S. retail sales report for Feb. and on position-squaring ahead of the OPEC meeting, bolstering prices back to 4800 before closing the week out on Friday with a small gain of 73 cents at 4625.
Heading into the new week, OPEC agreed to leave production quotas unchanged as additional cuts would risk further damage to the ailing global economy. The current goal for OPEC is to complete the existing cutbacks as its members still need to trim 800k barrels a day to comply with the record cuts from December. The cartel will meet again on May 28 to review policy. At the time of this writing, crude oil had dropped roughly $2.00, reversing the 5 week uptrend line (5 W ^ TL) placed at 4475 as trading resumed for Sunday’s Globex session. Fundamentally, we remain in a battle between the global recession and the prior OPEC cuts from December. The cuts thus far have been making an impact on inventories; however, OPEC will need full compliance by its members to further alleviate the supply glut.
From the technical perspective, as mentioned above, the 5 W ^ TL at 4475 has been pierced, setting an early bear tone to start off the week. With a gap down present off the OPEC news, look to ‘sell rallies’ against initial weekly Resistance at 4525-4700 with an objective at this week’s initial support range from 4300-4200. A violation of the 4200 level is expected to accelerate downward momentum targeting the key benchmark level at 4000-3944. Producing multiple closes below the 4000 mark is bearish on prices with the next key target range at 3700-3500.
Looking at the upside scenario’s, trade holding the 4300-4200 Support range alerts to lighten short positions as a short term rebound will likely unfold back into the 4500-4700 range. However, only trade above 4700 will flip momentum bullish with an initial objective at last week’s highs at 4815-4883. Producing any settlements above 4700 throughout the week will set the stage to challenge the 2009 highs at 5000-5050. The next key objective above 5050 is placed at the Dec 08 high at 5462.
