Oil Price Fundamental Daily Forecast – May Need Rally to Shake out the Weak Shorts

Crude oil futures are trading higher on Monday, driven by profit-taking, short-covering and aggressive counter-trend bargain hunting.

At 0403 GMT, August West Texas Intermediate crude oil futures are trading $43.52, up $0.51 or +1.16% and internationally-favored September Brent crude oil futures are at $46.29, up $0.54 or +1.18%.

Fundamentally, a weaker U.S. Dollar is helping to support crude oil by making it more attractive to foreign buyers. Despite the rally, gains are likely to be limited by the persistent supply glut and the uncertainty over the OPEC-led plan to curb production and stabilize prices.

In other news, U.S. energy firms added 11 oil rigs in the week to June 23, bringing the total count up to 758, the most since April 2014, according to energy services firm Baker Hughes.

According to the Commodity Futures Trading Commission, money managers cut net long U.S. crude futures and options holdings to their smallest long position since November.

Forecast

Last week, crude oil futures officially entered a bear market. This occurred when the market fell to 20% below its last major high in February. In doing so, it probably also hit an oversold level on a few of the technical indicators and oscillators that technical traders follow. Since there were no major changes in the fundamentals over the week-end, I suspect that profit-taking, short-covering and aggressive counter-trend buying is behind the rally.

The weaker dollar is also helping to make crude an attractive buy. This relationship should be watched today with the release of the U.S. Durable Goods report. The dollar could get whacked even more if the report comes in lower than expected.

The lack of fresh news allows us to take a look at the daily chart. The current short-term range is $45.28 to $42.05. The mid-point of this range is $43.67. Trader reaction to this level should determine the strength or weakness of this market today.

Bearish traders should note that the fundamental story is out there and traders made their adjustments last week to the news. Therefore, in order to move this market lower over the near-term, we are going to have to get some fresh bearish news.

I suspect this news will come in as the market nears the last main top at $45.28. This level is critical because if it is taken out, the trend will change to up on the daily chart. This could trigger the start of an even bigger short-covering rally. Bullish news could also drive this market through this top, changing the trend.

Right now, this market is all about positioning. The market may be saturated with shorts so we may need to see a strong enough rally over the near-term to shake the tree a little to drive out the weak shorts and allow the bigger players to re-establish their positions but at more favorable price levels.