Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Thursday, crude oil increased by 0.94% after the Energy Information Administration report showed a larger-than-expected decline in oil inventories. As a result, the back gold re-approached the December high. Will we see fresh highs in the coming week?
Although the EIA showed that gasoline stocks rose by 8.3 million barrels and distillate stockpiles increased by 10.1 million barrels (much above forecasts), the report also showed that crude oil inventories fell by 7.1 million barrels in the week to Dec. 30, easily beating analysts' expectations for an decrease of 2.2 million barrels. Additionally, refinery utilization rates rose by 1 percentage points, which together with the mentioned larger-than-expected decline in oil inventories affected positively the price of light crude. As a result, the back gold re-approached the December high. Will we see fresh highs in the coming week?
Let’s take a closer look at the charts below to find out (charts courtesy of http://stockcharts.com).
In our previous alert, we wrote the following:
(…) Will we see further improvement? In our opinion, it is likely, because the American Petroleum Institute reported late yesterday a larger-than-expected decline in oil inventories (a drop of 7.4 million barrels), which supported crude oil futures earlier today. This suggests that the commodity would follow them (…)
On the daily chart, we see that the situation developed in line with this scenario and crude oil extended gains yesterday. Although this is a positive event and light crude re-approached the December high, the technical situation continues to suggest that the space for gains seems limited. Therefore, what we wrote yesterday is up-to-date also today:
(…) on the weekly chart, there are several factors which can affect further growth. Firstly – the proximity to the red gap which serves as the nearest resistance. Secondly – the current position of the indicators. As you see, they climbed to their overbought zones and are close to generating sell signals. Thirdly – volume has fallen from week to week, raising doubts about the strength of oil bulls.
On the daily chart we also see that light crude remains well below the medium-term black resistance line and the red resistance line based on the previous highs (seen on the daily chart). Additionally, the invalidation of a breakout above the 2016 peak and its negative impact on the price is still in effect, supporting oil bears. On top of that, sell signals generated by the CCI and Stochastic Oscillator remain in play, suggesting lower prices in the near future.
Before we summarize today’s alert, we would also like to draw your attention to he current situation in the oil-to-gold ratio.
Looking at the daily chart, we see that the ratio invalidated the earlier breakout above the upper border of the blue rising trend channel, which is a bearish development that suggests further deterioration – especially when we factor in sell signals generated by the indicators. Therefore, in our opinion, as long as there is no invalidation of the breakdown under this line, another move to the downside is very likely.
What does it mean for crude oil? Taking into account the positive correlation between the ratio and the black gold, a decline in the ratio will likely translate into lower price of light crude in the coming week.
Summing up, the outlook for oil remains more bearish than bullish, however, it still doesn't justify opening short positions as light crude remains above the October peak and the lower border of the blue rising trend channel.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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