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 as news that the U.S. government has allowed some exports of a form of ultra light oil supported the price. However, the commodity gave up some gains after disappointing the EIA weekly report. In this way, light crude declined below the strong resistance zone once again. Is it time for a sizable downswing?

Although the U.S. has had a ban on crude-oil exports since the 1970s, the Commerce Department gave Pioneer Natural Resources Co. and Enterprise Products Partners LP permission to ship a type of ultra light oil known as condensate to foreign buyers yesterday. This news fueled expectations that the federal government is open to more broadly relaxing the export ban and pushed the price of light crude above $107 per barrel.Despite this improvement, the commodity reversed after a weekly the U.S. Energy Information Administration report showed that crude stockpiles rose by 1.7 million barrels in the week ended June 20, defying expectations for a decline of 1.6 million barrels. The report also showed that total gasoline inventories increased by 0.7 million barrels (below forecasts for a gain of 1.4 million barrels), while distillate stockpiles rose by 1.2 million barrels, above expectations for an increase of 0.9 million barrels.

These disappointing numbers took light crude below $107. Will it drop any further? Let’s check the technical picture of crude oil (charts courtesy of http://stockcharts.com).

The situation in the medium term has improved as crude oil came back above the medium-term black rising line, invalidating earlier breakdown. Although this is a bullish signal, the commodity still remains below the long-term declining resistance line. Therefore, we think that as long as light crude is trading in this narrow range another sizable move to the upside or downside is likely to be seen.

What can we infer from the daily chart?

Quoting our last Oil Trading Alert:

(…) crude oil reversed (…) and declined to the (…) green support zone (…) if it withstands the selling pressure, we’ll see a rebound – similarly to what we saw at the end of the previous week and the upside target will be around $107.30-$107.68, where the strong resistance zone is.

Looking at the above chart, we see that oil bulls realized the above-mentioned scenario as crude oil hit an intraday high of $107.50. Despite this improvement, the combination of the resistance zone (created by the 76.4% and 78.6% Fibonacci retracements) and the black resistance line successfully stopped further improvement – just like on Monday and also in mid-June. In both previous cases such price action triggered a correction, which took light crude to the green support zone. Taking this fact into account, it seems to us that history will repeat itself once again and we’ll see similar pullback in the coming day (or days).

Summing up, although crude oil moved higher, we remain bearish as the strong resistance zone and the medium-term black rising line withstood the buying pressure and still hold. Therefore, as we have pointed out before, we think that we’ll see another pullback from here and lower values of crude oil in the coming days.

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

Trading position (short-term): Short. Stop-loss order at $109.20. 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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