Oil Price Fundamental Daily Forecast – Surprise Reversal Likely Fueled by Technical Buying

U.S. West Texas Intermediate and internationally-favored Brent crude oil futures posted a potentially bullish closing price reversal bottom on Monday for no apparent fundamental reason. Technically, the market was oversold following a four day break of $3.67.

August West Texas Intermediate crude oil settled at $44.40, up $0.17 or +0.38% and September Brent crude oil closed at $46.88, up $0.17 or +0.36%.

It’s too early to tell if the move will develop into anything significant, but we have to pay attention to it anyway because it may set up the next shorting opportunity. This move could develop into something bullish, but usually it signals that the buying is greater than the selling at current price levels. Often it is designed to shake out the weaker shorts so that the bigger players will get an opportunity to re-short at more favorable price levels.

We could see a follow-through rally today on a move through $44.84, but since the main trend is down we could see short-sellers re-emerge on a test of $45.48 to $45.92. Trader reaction to this price zone will tell us if the buying is strong enough to continue the rally, or if the selling is strong enough to resume the downtrend.

Fundamentally, there was no major news event to fuel the turnaround so most traders attributed the reversal to technical factors. Gains could be limited because of worries over increased U.S. drilling activity and uncertainty over Libyan and Nigerian production.

In other news, several key OPEC ministers are scheduled to meet non-OPEC Russia on July 24 in St. Petersburg, Russia, to discuss the current situation in the global oil markets.

Nigeria and Libya were invited to the meeting and their production could be capped earlier than November, when OPEC is scheduled to hold formal talks, according to Bloomberg. Officials from Nigeria said they were unable to attend the meeting because of a previous commitment. Libya said on Monday it was ready to talk about a production cap, but added that its political, economic and humanitarian situation should be taken into account in talks on caps.

Forecast

Whatever the reason for the sudden reversal in prices, there was upside momentum on the close so early in the session, we have to expect this momentum to continue. This makes yesterday’s high at $44.84 the first major target.

If enough sellers come in to stop the move then prices could retreat into $44.06. At this point, prices are likely to remain rangebound the rest of the session, surrounded by $44.69 to $44.06.

If there is enough upside momentum to trigger a follow-through rally then we just have to wait for a move into $45.48 to $45.92 where the next wave of sellers are likely positioned.

The key reports this week are the American Petroleum Institute’s inventories report on Tuesday and the U.S. Energy Information Administration’s inventories report on Wednesday. However, traders should continue to watch for news on Nigerian and Libyan production especially since OPEC may try to put a cap on their output. Any news on U.S. or OPEC production is also likely to trigger some intraday volatility.