« Grain Market's Quiet Ahead of USDA Report | Main | "Nothing to See Here Folks" »

Is Oil Price Rally Sustainable or Short-covering?

Friday, May 12, 2017

Today's Spotlight Market

On Wednesday, Energy Information Administration's weekly stocks report showed U.S. Oil inventories fell by 5.247 million barrels during the week ending May 5. This brings U.S. Oil inventories down to 522.525 million barrels. While this was the 6th consecutive weekly decline for Oil inventories, U.S. Crude stocks remain over 14 million barrels above last year's levels and a whopping 112 million barrels above the 5-year average. Crude products such as Gasoline and Distillates are seeing tighter inventories, with Gasoline inventories only a bit over 500,000 barrels above last year's total and Distillates inventories down over 6.5 million barrels from last year.


Fundamentals

After a brief decline below $44 per barrel last week, the lead month June Crude Oil futures have rallied over $4 per barrel during the past 5 trading sessions, as signs that OPEC production cuts may actually be occurring along with a lower than expected draw in U.S. Crude inventories last week provided traders evidence that a global Oil glut may be dissipating. To be fair, we do note that Oil prices appeared to have become oversold by looking at the daily chart as well as momentum indicators such as the 14-day relative strength index (RSI), so the recent pop in prices may end up being nothing more than a short-covering bounce. However, we have seen U.S. refining rates running over 2 % above the 5-year average for this time of year, and with the "official" start to the summer driving season during the Memorial Day weekend a little over 2-weeks away, we may see refiners continue to ramp-up oil demand to assure adequate supplies of fuel going into the summer.

Technical Notes

Looking at the daily chart for the lead month June Crude Oil futures, we notice the market making a strong reversal following a move to new 5 ½ month lows on May 5. Since that time, the June futures rallied from a low of $43.76 to $48.22 in 5 trading sessions in what appears to be a bout of short-covering buying. We do note that trading volume has started to trend lower during the recent rally, and a look at the daily chart shows some significant resistance between the $49 and $50 price levels, including the 20-day moving average which is hovering at 49.06 as of this writing. The 14-day RSI has rebounded from oversold levels and is approaching neutral territory with a current reading of 44.16. Major chart support is seen at the May 5 low of 43.76, with chart resistance found at the April 24 high at 50.22.

Mike Zarembski, Senior Commodity Analyst