Crude Oil Price Analysis for May 3, 2017

Oil prices tumbled 2.4% on Tuesday as hedge fund finally gave up the ghost and liquidated long positions, driving the price of oil through support levels, ahead of Tuesday API inventory report, and Wednesday estimate by the Department of Energy.  The Market will now turn its attention to OPEC to see if they have the stamina to continue to hold up oil prices.

Crude oil sliced through support levels, and are now poised to test the 46 handle. The trend line that generated support was also the neckline of a head and shoulder pattern, which now saw the right shoulder break through on heavy volume. The head and shoulder pattern is a reversal pattern as prices attempt to go higher they are rejected, and eventually form the top of an uptrend. After prices test the 46, level the next level of target support is seen near the August lows near 44.60. Resistance is seen near former support near 48.20 and then the 10-day moving average at 49.43.

Momentum is negative as the MACD (moving average convergence divergence) index prints in the red with a downward sloping trajectory which points to lower prices for crude. The RSI (relative strength index) moved lower with price action, pushing through support which also reflects accelerating negative momentum. The current reading of the RSI is 29, which is below the oversold trigger level of 30 and could foreshadow a correction in crude oil prices.

The weekly chart of crude oil shows that prices are down nearly 3.5% for the week, and are testing trend line support generated from the low in August of 2016 to the lows in November of 2016, and comes in near 47.20.  Weekly momentum is negative as the MACD (moving average convergence divergence) index prints in the red with a downward sloping trajectory which points to lower crude oil prices.  The RSI moved lower with price action reflecting accelerating negative momentum, while printing a reading of 43, which is in the middle of the neutral range.

Hedge Funds are Very Long Crude Oil

Hedge fund traders finally gave up the ghost which will likely be evident when the CFTC reports its commitment of trader’s report for the week ending May 2, 2017.  The latest report for the week ending April 25, 2017, showed a large decline in long positions in futures and options by managed money.  According to the CFTC, managed money reduced long position in futures and option by 52K contracts, while increasing short positions in futures and options by 16.5K contracts.  Despite this large change, hedge funds that were long futures and options outnumber shorts in futures and options by a whopping 255K contracts, 335K contracts long versus 80K contracts short. This large long position liquidation was likely the catalyst for the dive in prices on Tuesday.  Moving forward, there is probably more to go, which could see prices continue to move lower.

OPEC Will Be the Next Guide

Traders will next turn their attention to the May-25 meeting of OPEC and allied crude producing nations, where a six-month extension to their supply trimming program is now widely expected to be announced. OPEC will need to act quickly to stem the tide of declining prices.  On Wednesday, the Department of Energy will report their estimate of crude oil inventories.

U.S. shale production will likely limit oil price gains going forward, while reports that Libya has increased its output has capped upside moves as well. Key will be whether or not the OPEC/NOPEC production cuts will be extended beyond June. BP’s CFO earlier said that global oil inventories would return to their five-year average by the end of 2017 if the cuts were extended.

U.S. crude inventory data this week is expected to correct for a four-straight week from the record high seen in late March, though remain 10% above levels seen at the end of 2016.

OPEC production slipped during the last week, but so does compliance. Reuters reports that production from Saudi Arabia remained low in April, and output fell in Nigeria and Libya, although the latter two countries are exempted from the OPEC deal. Meanwhile, Angola and the UAE actually added production, leading to a slight fall in the OPEC-wide compliance rate from 92% in March to just 90 % in April. Russia also reported incremental progress on its pledge, reducing output to 11 million barrels per day.