Trading position (short-term; our opinion): Speculative short positions in crude oil seem to be justified from the risk/reward perspective.

On Wednesday, crude oil moved higher supported by a drop in crude oil inventories. Despite this improvement, the commodity reversed and decline, losing 0.44% as gasoline and diesel supplies weighted on the price. Thanks to these circumstances, light crude came back to ist important support, but will it withstand once again?

Yesterday, the U.S. Energy Information Administration showed in its weekly report that crude oil stockpiles fell 3.4 million barrels in the week ended May 30, beating expectations of a 271,000-barrel decrease. Despite these bullish numbers, the decline was largely due to higher refinery demand and a reduction in imports, which questioned its positive impact on the price. Additionally, high stockpiles of oil products like gasoline and diesel offset the impact of a drop in crude stocks, signaling that the summer driving season is not as robust as expected. In reaction to this news, the commodity moved lower, finishing the day near the weekly low. Will it drop any further from here? Let’s examine technical factors, which could drive crude oil higher or lower in the nearest future (charts courtesy of http://stockcharts.com ).

The medium-term situation remains unchanged as crude oil is still trading below the blue resistance line based on the recent highs (the upper border of the triangle). Therefore, we still believe that the proximity to this line will continue to be supportive for oil bears and we’ll see futher deterioration and a pullback to around the 50-week moving average (currently at $101.08) in the coming week (or weeks).

Once we know the above, let’s check on the very short-term picture.

Quoting our last Oil Trading Alert:

(…) Taking into account the importance of the black medium-term declining line (…) if this strong support encourages oil investors to push the buy button, we may see a corrective upswing to around $103.56, where the Friday high is.

Looking at the daily chart, we see that although oil bulls realized the above-mentioned scenario, pushing crude oil to the intraday high of $103.69, this improvement was only temporarily. As a result, light crude reversed and declined to the 38.2% Fibonacci retracement based on the recent rally once again. On one hand, if history repeats itself and this support level holds, we will likely see another attempt to reach the lower border of the rising trend channel. However, if it is broken (which is more likely in our opinion), we will see a re-test of the strength of the black medium-term declining line (currently around $101.83). At this point, it’s worth noting that this area is also supported by the 50-day moving average (and the 50% Fibonacci retracement at $101.62). Therefore, if it doesn’t withstand the selling pressure, we might see a sharp decline to the next Fibonacci retracement (at $100.94) or even to the 200-day moving average (currently at $100.20) and another test of the strength of the psychological barrier of $100. Please keep in mind that sell signals generated by the CCI and Stochastic Oscillator are still in play, supporting the bearish case.

Summing up, although crude oil hit its upside target, oil bulls didn’t manage to hold gained levels and the commodity declined, reaching the 38.2% Fibonacci retracement once again. Although we may see a rebound from here (if this support level holds), it seems more likely to us that we’ll see further deterioration and lower values of crude oil in the coming days. Please keep in mind that 3 major technical factors that we mentioned yesterday (sell signals generated by the indicators remain in place, the breakdown below the lower border of the rising trend channel was verified and light crude remains well below the strong resistance zone) still support this bearish scenario.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: mixed

Trading position (short-term): Short. Stop-loss order at $105.50. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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