It was an interesting week for crude oil, which finally managed to find some bullish momentum this past week, with only Friday’s close lower, just failing to make it five straight days of gains for the commodity, as the May WTI contract closed the week at $55.74 per barrel on the daily chart. The move higher was assisted by the combination of several factors both technical and fundamental.
From a technical perspective, the move off the lows of mid March has been accompanied by rising volume on the up days, and in particular this was a feature of last week’s price action with the start of the week characterized with rising volume and rising prices. In addition, the break and hold initially through the deep resistance level at $50 per barrel, and thereafter through the second and higher level at $53 per barrel, has helped to confirm the bullish sentiment. However, whilst the week ended positively, for any further gains we are now testing a key level in the $57 per barrel region, as shown with the double dotted blue and red lines, denoting a deep area of price accumulation and distribution, and for oil prices to continue moving higher, this level will now need to be breached.
Indeed, it was this level in February which proved to be the stumbling block at the time, when it was duly tested and held firm, providing a solid barrier to the rally, with the commodity duly rolling over and returning to the longer term bearish sentiment. Last week saw this level tested on three consecutive days, with a failure on each, most notably on Friday, which is the reason this level is now pivotal in the short term. If it is pierced, then we can expect to see oil prices rally higher, but any failure may see a consolidation phase develop between this level, with support regions below in the $53 and $50 per barrel areas. It is also interesting to note that in the latest CFTC release oil speculators have increased their net long positions reflecting the shift in sentiment.
Moving to the longer time frames, namely the month chart, here the technical picture confirms the current bounce for oil, where we are seeing narrow price action coupled with very high volume. In other words, the development of a classic accumulation pattern.
From a fundamental standpoint, last week's oil inventories finally delivered a number which fell below the forecast, and despite it still being a build in inventories, was well below expectations at 1.3M bbls against a forecast of 3.5M bbls, far away from last week’s extreme 10.9M bbls. This duly helped to propel oil prices higher; Plus, with OPEC raising prices to its Asian customer base, this too has given the commodity a lift.
Finally, the US dollar too has played its part. With the currency moving lower, off the highs of the last few weeks as Fed rhetoric cools as a result of weaker US data, the longer term outlook for oil is now shifting, with longer term bearish sentiment moving to mildly bullish. This too is reflected on the trend monitor at the bottom of the daily chart, which has transitioned to blue, confirming this change in outlook for oil.
However, the key price point is now $57 per barrel, which if broken and supported with strong and rising volume, will help to lift the commodity to the next logical target in place, namely $61.50 per barrel.