Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

Although crude oil moved little higher after the market’s open, a bearish EIA weekly report on crude oil inventories pushed the commodity sharply lower. As a result, light crude lost 2.72% and closed the day under $36. Will we see further deterioration?

Yesterday, the U.S. Energy Information Administration reported that crude oil inventories increased by 4.8 million barrels for the week ending on Dec. 11. Additionally, gasoline inventories increased by 1.7 million barrels and distillate fuel inventories rose by 2.6 million barrels for the week. Thanks to these bearish numbers, light crude declined and lost 2.72%, closing the day under $36. Will we see further deterioration? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).

Yesterday, we wrote:

(…) light crude reached our initial upside target, but then pulled back slightly and closed the day under the Aug low. This suggests that the recent move could be a verification of earlier breakdown under this important level. In this case, further deterioration should not surprise us.

As you see on the charts, the situation developed in line with the above scenario and crude oil moved lower, reaching an intraday low of $35.29. Taking this fact into account, and combining it with the negative fundamental factor (a bigger-than-expected increase in crude oil inventories), we think that light crude will re-test the strength of the neck line of the head and shoulders formation (marked on the weekly chart), the lower border of the red declining trend channel (marked on the daily chart) and will approach the recent low.

Nevertheless, we should keep in mind that the current position of the indicators (daily buy signals remain in place) suggests that oil bulls will try to push the commodity higher. If this is the case, the initial upside target would be the red horizontal resistance line (based on the Aug low). If it is broken, we’ll likely see an increase to our next upside target - the barrier of $40 (please note that this area is also reinforced by the 38.2% Fibonacci retracement based on the Nov-Dec declines).

Summing up, crude oil reversed and declined, which looks like a verification of the breakdown under the Aug lows. Although this is a negative signal, the current position of the indicators suggests that oil bulls will try to push the commodity higher. Consequently, in our opinion, the medium-term trend remains down and lower values of the commodity are still ahead us. Therefore, we’ll likely re-open short positions at higher prices (after crude oil will finish its corrective upswing) in near future.

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

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

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