Tonights EIA Inventory figures will have more importance to crude oil's direction than the 3rd presidential debate. We look at a couple of possible storm clouds that may spoil oil’s party.
West Texas Intermediate has spent the last week consolidating in a roughly 49.50/51.00 range. The pace of OPEC “we can do it” headlines have slowed, and Russia has been quiet on the topic of production cuts as well. The USD has been weaker over the past few days which has helped maintain a bullish bias on crude and indeed commodities as a whole.
Thermal Coal in Australia, Iron Ore, and a good New Zealand Dairy Auction have all surprised to the topside in recent days. I think it is a bit premature to say this is the end of the commodities bust; rather I suspect extended USD long positioning is being washed out ahead of tomorrow’s presidential debate and the ECB rate decision.
Last night’s US CPI has nearly made a hike in December by the Federal Reserve a done deal. The likely trajectory of US rates continues to be the elephant in the room for most asset class pricing going forward.
Getting back to oil, tomorrow 3rd presidential debate, whilst it will be no doubt entertaining/despairing in equal measures will not be the mover of oil prices. Rather, tonight’s US Energy Information Administration (EIA) Crude Inventory Report will be.
The American Petroleum Institutes (API) inventory report last night yet again showed an unexpected drawdown in stocks. Tonight we are expecting the EIA to show an increase in stocks of 2.705 million barrels following the previous week’s massive 4.9 mil increase.
The API report no doubt has oil bulls licking their lips in anticipation of an undershoot tonight by the EIA, perhaps to correct last week’s massive upside surprise in stocks. I can’t argue with this on face value.
The world is certainly bullish generally for oil. I’ve learned the hard way that the old adage, “the world can stay irrational, longer than you can stay solvent,” is perhaps the single greatest piece of investment advice ever given. Therefore I shall not wring my hands in frustration as the street ignores OPEC’s own projections of 2017 oil demand, their ability in the past to adhere remotely to production ceilings, or the chances of getting the Russians on board.
However, to give some different balance ahead of tonight’s EIA numbers I would draw readers attention to a couple of things that are weighing on my mind.
The CFTC Commitment of Traders Report shows speculative longs in the futures market at yearly highs. Consider the chart below showing Light Sweet Oil Futures. What is important to note here is the purple Money Managers Longs (read speculators) Line showing the number of speculative longs out there. It is now equal to the total open interest of the entire futures contract. So a lot of people are long oil already.
Source: Quandl COT
Looking at our own West Texas Intermediate Chart, WTI is in an ascending triangle. Resistance clearly lies at 51.40 with support at 49.50. The formation is bullish with a daily close above 51.50
The formation is bullish with a daily close above 51.50 signaling much higher levels, possibly towards 55.00.
A close below 49.50 signals a move back towards 46.00.
However, a word of caution, the MACD fast indicator (in blue) has crossed the slow indicator (in red). As WTI climbs, momentum has turned down signaling bearish divergence.
Summary
I cannot argue that oil along with most commodities are “hot” at the moment. Chartwise, WTI is most certainly in a bullish formation. However, bearish divergence on the charts and extreme long positioning of speculators in the futures means some caution may be warranted through the EIA Inventories this evening.