Crude Oil Outlook: $50.00 Test Is In

The $50.00 level we talked about last week has sustained its first test. On yesterday’s open, September WTI crude oil rallied to an intrasession high of $50.06. The price immediately underwent reversal. Currently, crude oil is trading around $49.50.

So, where do we go from here? As my colleague Arslan mentioned earlier today, WTI crude oil has shown considerable strength due to the draws on inventory and news out of Saudi Arabia. Are we to expect sustained buying from this area or the formation of an intermediate top?

Politics, Politics, Politics

The global political atmosphere is creating uncertainty among traders. As a general rule, uncertainty drives demand for commodities. This summer’s international political scene may act as a catalyst for a considerable rally in crude oil.

Here are a few issues that are impacting oil valuations:

• U.S. inventories are down 10% from March.

• U.S. production is down. The Baker Hughes rig count from last Friday shows only 10 new drilling rigs for July.

• Pending sanctions against Venezuela will further reduce U.S. supply.

• The successful North Korean ICBM test over the weekend has garnered attention from investors. A response from the U.S. may be unavoidable.

• A meeting between OPEC and non-OPEC members on August 7-8 will shed some light on future production.  

Technicals

There is no doubt that the $50.00 level is a crucial area for the long-term dynamic of the market. The intermediate term technicals remain bullish, although September WTI Crude futures are threatening to close in the negative for the session.

September WTI Crude Oil Futures-Daily Chart  

Aside from $50.00, the key number is 38% of the current move, $48.28. We are likely to see some compression between the two levels. Entering a corrective phase is very possible. However, we must see trading under a daily session low before calling an end to the bull run.

The U.S. EIA inventory numbers for this week will carry a lot of weight on Wednesday. At least for now, it is time to wait and see.

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Dave Green

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