Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Wednesday, crude oil gained 1.88% as news from Iran overshadowed the bearish EIA weekly report. In these circumstances, light crude climbed above $51 and invalidated the breakdown under important support line. What does it mean for the commodity?
Yesterday, the U.S. Energy Information Administration (EIA) reported that crude oil inventories rose by 10.3 million barrels for the week that ended Feb. 27, missing expectations for an increase of 4.0 million barrels. It was the largest weekly increase since 2002 and U.S. crude oil inventories stood at 444.4 million barrels as of last week, which is the highest level sinc at least 80 years. The report also showed that gasoline inventories increased by 46,000 barrels (missing expectations for a drop of 1.9 million), while distillate stockpiles declined by 1.7 million barrels. Additionally, at the Cushing Oil Hub in Oklahoma, inventory levels increased to 49.2 million barrels, which fuelled concerns over a supply glut in U.S. and pushed crude oil to an inraday low of $49.60.
Despite this deterioration the commodity rebounded later in the day as Tehran's ambassador said that no deal had been reached on the duration of any possible final agreement with world powers on Iran's program. That news fuelled hopes that an imminent rise in Iranian oil supply will not add to global market and pushed ight crude to an inraday high of $51.99. Did this increase change the very short-term picture? (charts courtesy of http://stockcharts.com).
From the medium-term perspective, we see that crude oil extended gains and climbed above the 78.6% Fibonacci retracement, invalidating earlier breakdown. Although this is a positive signal, we should keep in mind that the commodity still remains the under the 76.4% retracement level and the upper line of the consolidation (which also reinforced by the Dec lows), while the bearish engulfing pattern is still in play. In our opinion, the medium-term picture will improve significantly, if we see a breakout above these levels.
Meanwhile, let’s examine the daily chart and find out how did this rally affect the very short-term picture.
From this perspective, we see that crude oil moved higher once again and climbed above the lower border of the blue triangle, which is a positive signal. Additionally, yesterday’s move materialized on higher volume than we saw in the previous days, which suggests that we’ll see another attempt to break above the black resistance line in the coming day(s). If we see such price action, the probability of a breakout above the upper line of the formation will increase. If this is the case, oil bulls will open the way to the Feb highs. At this point, it’s worth noting that the Stochastic Oscillator generated a buy signal, supporting the above-mentioned scenario. Nevertheless, taking into account the medium-term picture, we should keep in mind that if the black resistance line withstands the buying pressure, light crude will reverse and test the blue support line.
Summing up, crude oil moved higher once again and invalidated the breakdown under the lower border of the blue triangle, which suggests another attempt to break above the black resistance line in the coming day(s). If we see such price action, and crude oil additionally increases above the upper line of the formation, we’ll consider opening long positions. Until this time, waiting on the sidelines for a confirmation/invalidation of the above is the best choice at the moment.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment, but we will keep you informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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