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Oil Price Struggle to Rebound over $50 as Shale Production Rises

Friday, March 17, 2017

Today's Spotlight Market

Large speculators continue to be heavily long Crude Oil and the Oil products but we have seen some long liquidation selling starting to occur. The most recent Commitment of Traders reports shows that non-commercial traders were net-long a whopping 555,917 contracts as of March 7 reducing this very large position by 7,676 contracts during the reporting period. However, these large speculators added to their net long positions in both Gasoline and Middle Distillates during the same time period. Small speculators are also overall net-long Crude and the products but did the opposite of the non-commercials by adding over 7,100 new net long positions to Crude Oil and reducing the net-long position in Gasoline and Diesel by 2,779 and 4,653 contracts respectively.


Following a steep price sell-off the past several trading sessions, Crude Oil prices have recovered off of recent lows but continue to struggle to move above 50.00 in the lead month April futures. This week's price recovery was attributed to a weakening U.S. Dollar which makes commodities priced in Dollars more attractive to non-Dollar users as well as weekly inventory declines in both Crude Oil and the major refined products including Gasoline and Diesel fuel. However, the price recovery has been modest as traders are starting to believe that OPEC members may not be willing to honor production cuts announced towards the end of 2016. In addition, U.S. Shale producers are continuing to improve drilling techniques which has continued to lower the break-even costs of production. Lower drilling costs will encourage producers to ramp up production even at lower price level for Crude as long as it remains profitable.

Technical Notes

Looking at the daily chart for April Crude Oil, we notice after prices fell to nearly 4-month lows on Tuesday, we have seen some buying emerge which took the lead month futures from just above $47 per barrel on Tuesday to $49.62 at its highest on Thursday before prices drifted lower going into the April option expiration at 1:30 pm Central time with settlement at 48.75. Prices remain well below both the 20 and 200-day moving averages and the 14-day RSI remains week but has recently moved back above oversold territory with a current reading of 32.61. It appears that the November 2016 low of 45.18 is the next major support level for the April contract with chart resistance found at the February 8 low of 51.86.

Mike Zarembski, Senior Commodity Analyst