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David Becker

Approximately 8-days ago, I discussed the upward momentum in the energy patch and the impending breakout of trend line resistance, as momentum was accelerating. Since then, the energy sector is up approximately 4%, and investors continue to bet on further upside. Thousands of upside call options on producers were transacted this week. Stocks like APA, and ETFS like XOP are helping to buoy the SIXE higher. Meanwhile, crude oil rises to hit $59.80 on Friday, up nearly 5% on the week and breaking out of trend line resistance.

According to the US Department of Energy, total product demand, including heating oil, diesel fuel, and gasoline, is only down 5.8% year over year, but supply is down 15% year over year. Technically, the energy sector ETF that follows both producers,  integrated firms and services companies is breaking higher and likely to push through the January highs.

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US Inventories Dropped

U.S. commercial crude oil inventories decreased by 6.6 million barrels from the previous week. These stockpiles are now only 2% above the five year average for this time of year. Gasoline inventories increased by 4.3 million barrels last week, and distillate fuel inventories decreased by 1.7 million barrels. Total commercial petroleum inventories fell by 11.2 million barrels last week.

Total demand during the past month was 19.5 million barrels a day. The surprise was that distillate fuel demand averaged 4.2 million barrels a day over the past four weeks, up by 1.9% from the same period last year. The lack of air travel continues to way on Jet fuel demand, which was down 33.7% compared with the same four-week period last year.


Technical Analysis

The SIXE rallied 4% and is having difficulty pushing through resistance but continues to probe that area and is likely to accelerate through the January highs at 471. Support is seen near the 10-day moving average at 446. Short-term momentum is positive but beginning to decelerate. The fast stochastic has generated a crossover sell signal. The current reading on the fast stochastic is 93, well above the overbought trigger level of 80, foreshadowing a correction. The trend is upward sloping as the 10-day moving average accelerates away from the 50-day moving average after just touching it at the beginning of February. Medium-term momentum is positive as the MACD (moving average convergence divergence) histogram is printing in positive territory with a rising trajectory, which points to higher prices. The RSI (relative strength index) is consolidating and moving sideways printing a reading of 60, which is on the upper end of the neutral range but also points to consolidation.

The Bottom Line

Prices are near a critical junction, and an above close resistance near the January highs will be the key for further upside. Prices might consolidate and form a bull flag pattern, but the trend should remain upward, sloping in the short-term. This market has lagged the broader markets and should have some catching up as crude oil continues to make headway.

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