The markets have been rallying for two weeks as investors have keyed in on signs of a slowdown in production and the easing of coronavirus-related restrictions across the globe. Back-to-back smaller than expected crude oil inventory builds have been supportive, but the rise in distillate stockpiles offset that news.
Positive geopolitical developments could be the bullish wildcard next week. On Friday, the markets garnered a little support after United States and Chinese officials discussed a trade deal agreed before the coronavirus outbreak, with both sides agreeing to implement the agreement.
We’re seeing a lot of short-covering, but traders have been reluctant to go long given the bearish fundamentals. This may change if prices pullback into a value area. Furthermore, traders are not going to gain confidence in playing the long side until they start to see that the attempts to reopen the economy are proving to be successful.
Despite the recent strength, traders should continue to look for heightened volatility and the possibility of a wicked two-sided trade as some momentum traders get bullish on the easing of restrictions and some turn bearish again as inventories continue to build.
The assumptions on the supply side that are driving prices higher right now are certainly supported by data. There has already been a massive decline in the rig count, taking the number of active rigs in America to new lows. That has a big impact on where we will be in the future, but unless there is enough demand to eat into the existing glut, that won’t make much difference to the short-term storage issue.
On the demand side, things aren’t as clear-cut. I hope and pray that things go smoothly as some states begin to reopen, but there is a chance that it is just too soon. If so and coronavirus cases spike, that anticipation of big increases in demand disappears and oil will likely collapse again. Even if the worst-case scenario doesn’t unfold though, reopening is a gradual process and it is hard to imagine that gasoline demand will be robust enough initially to allow for a further jump in crude over the next several weeks. Retail gasoline sales while better than they were, remain weak.
YEARLY Crude Oil Cycles
- The 10 year cycle makes a high on May 3 and then sells off sharply into May 25 after which it rallies from a major low
- The 20 year cycle rallies sharply into May 19 then trades sideways into month end.
- The 30 year cycle rallies into May 14 then sells off into the end of the month.
- The 10 and 30 year cycles both head down from the 14th May.
Key turning point dates:
- May 4
- May 18
- May 29
MONTHLY Crude Oil Outlook ( JULY – CLN20 )
The $13.00 price area can absorb annual selling pressures. Above the mid $29.00 price area remains a several week target. Potentially the mid $55.00 price area is in reach over the next several months.
The mid $29.00 price area can likely absorb buying pressure throughout the balance of May. Once tested, the market is susceptible to falling back to key support at the $13.00 price area within several weeks.
On the other hand, a daily settlement above the mid $29.00 price area indicates a good annual low has been made. Then the mid $41.00 price area would be expected within several weeks and the mid $55.00 price area then attainable within several months, likely making the high for the remainder of the year.
A weekly settlement below the $13.00 price area would likely yield a $5.00 price area retest within several weeks, the lowest price support presently found on any chart without revisiting negative price territories.
WEEKLY Crude Oil Outlook ( JULY – CLM20 )
The main trend is bearish according to the weekly swing chart, but the closing price reversal bottom from the week ending May 1 and its subsequent confirmation, helped shift momentum to the upside.
The actual main trend will change to bullish on a trade through the last main bottom at $54.86. This is highly unlikely, however, there is room to the upside for the market to complete a normal 50% to 61.8% retracement.
A trade through $17.27 will negate the closing price reversal bottom and signal a resumption of the bearish trend.
The minor trend is also bearish. A trade through $35.18 will change the minor trend to bullish. This will confirm the shift in momentum to bullish. The minor range is $37.64 to $17.27. Its 50% level at $27.46 is providing resistance. This price level is also controlling the short-term direction of the market.
The short-term range is $54.86 to $17.27. Its 50% level at $36.07 is the next potential upside target. The main range at $40.11 to $45.50 is the major upside target.
Based on last week’s price action, the direction of the July WTI crude oil market the week-ending May 15 is likely to be determined by a downtrending Gann angle at $26.95.
A sustained move over $26.95 will indicate the presence of buyers. This could lead to a labored rally with targets including a 50% level at $27.46, followed by another downtrending Gann angle at $30.86. This is a potential trigger point for an acceleration to the upside with the next target a 50% level at $36.07.
A sustained move under $26.95 will signal the presence of sellers. The first target is a minor pivot at $22.93, followed by the reversal bottom at $17.27.
In order to generate the momentum needed to drive this market away from the late April bottom, the buying is going to have to be strong enough to overcome the pair of downtrending Gann angles at $26.95 and $30.86.