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James Hyerczyk
Crude Oil
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading mixed early Tuesday. Five days of sideways trading action suggests investor indecision and impending volatility. It looks as if traders are waiting for some big news.

It could come from equities where the major global stock indexes are rallying on the back of an impressive rebound in China’s key indexes. According to reports, the rally in the mainland Chinese stock market started after the country’s securities regulator said it would improve market liquidity and guide more long-term capital into the market.

After this month’s huge decline, bullish crude oil investors are looking for any news that could encourage an end-of-the-month recovery. This could include profit-taking, short-covering or aggressive counter-trend buying.

At 1138 GMT, December West Texas Intermediate crude oil futures are trading $67.01, down $0.03 or -0.05%. January Brent crude oil is at $77.11, down $0.26 or -0.34%.

Fundamentally, the narrative remains the same. Prices are being weighed down by rising global supply despite looming sanctions on Iran’s crude exports. Traders have also been influenced by a rapid plunge in global equity markets that has pressured demand for risky assets. A stronger U.S. Dollar has also reduced foreign demand for dollar-denominated assets like crude oil.

Other bearish factors helping to limit gains are concerns over global oil demand growth and Saudi Arabia’s pledge to produce as much oil as possible. Russia has also indicated that it will provide enough oil to meet demand once U.S. sanctions hit Iran from next week. Additionally, hedge fund managers continued to liquidate former bullish positions last week, with signs of short-selling appearing for the first time in over a year.

Forecast

The bearish news is piling up but prices haven’t moved much since last week’s steep plunge, which suggests the bad news may already be baked into the price. The sideways chart pattern suggests the worst may be over and speculators are waiting for bullish news. However, you can’t really anticipate it. You have to wait for the move to begin and you have to see the volume on the breakout to determine if the move is being fueled by short-covering, aggressive counter-trend buying or a combination of the two.

There is still one unknown that could drive prices sharply higher from current price levels. No one really knows the impact on Iran’s ability to produce and export amid the sanctions. This may be enough to attract speculative buying ahead of November 4.

Later today, investors will get the opportunity to react to the latest inventories data from the American Petroleum Institute. The report is expected to show another large build in U.S. inventories of perhaps as much as 6.3 million barrels per day.

Like I said earlier, the chart pattern suggests impending volatility, but the direction is unknown at this time. All we can do today is prepare for a surprise event.

 

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