Crude Oil Price Analysis for May 8, 2017

Crude oil prices rebounded sharply after tumbling down to the 43.78 level during the Asian trading session and slowly rebounding back up to close up on the trading session. Resistance is seen near former support near the March lows at 47.05.  Hedge funds appear to have been the catalyst that drove prices lower, exiting their long positions which were sizable.

Technicals

WTI crude oil prices were hammered this week, dropping more than 12% before rebounding ahead of Friday’s NY open.  The smaller than expected decline in crude oil inventories was likely the catalyst that started the slide, but hedge funds liquidated huge volumes as they were caught off sides according to the April 25^th commitment of trader’s report.  Resistance is seen near former support near the March lows at 47.05.

While the chart looks ugly, with support not until 41.73 on a weekly basis, OPEC’s decision to extend production cuts, should allow prices to find a foothold, and begin to trade higher in a well-established $40 to $55 per barrel range. OPEC’s cuts should balance global inventories by the end of 2017.  There has been very little cheating as compliance has been robust, but production from Non-OPEC including the United States, has increase to fill the void left by declines in OPEC production.

The daily chart shows the prices whipsawed slamming lower and the sharply rebounding above support which was resistance near 44.53.  Prices had generated a head and shoulder reversal pattern, which could continue to test target support levels near the January 2016 lows at 36.18. Resistance is now seen near the 10-day moving average at 48.27, which coincides with the neckline of the head and shoulder pattern.

Despite the rally in crude oil following the plunge during Asian hours, prices remain oversold. The RSI (relative strength index) which is a momentum oscillator that measures overbought and oversold levels, combined with accelerating and decelerating momentum, edged higher but is printing a reading of 29, which is below the oversold trigger level of 30 and could still foreshadow a correction. Prices were oversold 3- times in the last 18-month at in each circumstance, rebounded sharply.

Hedge Funds Were Offsides This Week

Hedge funds were caught offside and that was the reason behind the mini-flash crash crude oil prices experienced. Volume surged as prices fell and hedge funds headed for the exits.  It was clear from the latest commitment of trader’s report that managed money was offsides. Hedge fund traders liquidated their positions which will likely be evident when the CFTC reports its commitment of trader’s report for the week ending May 2, 2017.

Ahead of this past week ending Tuesday, managed money was long 335K contracts long versus 80K contracts short.  Once prices started to quickly role downhill, hedge funds quickly looked for the exits, with prices breaking through trend line support.

Rigs Counts Continue to Rise

According to Oil Service Giant Baker Hughes, the number of active oil and gas rigs in the United States rose by 7 on Friday, showing that production even after this week’s drop is still continuing to grow in the United States. The total oil and gas rig count in the US now stands at 877 rigs, or 462 above the count a year ago. Oil rigs increased by 6, while gas rigs bumped up 2; a single miscellaneous rig was taken out of production.

 

Better than Expected Payrolls Help Buoy Crude

U.S. nonfarm payrolls rose 211k in April after a 79k increase in March which was revised down from 98k and a 232k gain in February which was revised up from 219k, for a net -6k revision. Expectations were for a 190K rise. The unemployment rate dipped to 4.4% from 4.5% in March. The labor force rose 12k after the prior 145k jump, while household employment was up 156k versus 472k previously. Average hourly earnings rose 0.3% following March’s 0.1% gain which was revised from 0.2%. Hours worked were 34.4, up from 34.3. Private employment increased 194k from 77k which was revised from 89k following gains of over 200k in February and January. The goods producing sector added 21k, with construction up 5k, and manufacturing at 6k. Private services employment rose 173k from 54k previously which was revised from 61k, with leisure/hospitality adding 55k. Government employment increased 17k, but Federal government jobs declined 6k.