No single dynamics in oil prices

WTI crude oil prices (USOIL) declined in the first half of the week but recovered in the second half to limit losses. Nevertheless, the price of oil declined for a fifth straight week to erase a bulk of the gains posted in July. Economic Calendar reports in its article Crude Oil Prices Weekly Forecast September 4-8 that investors weighed the potential impact of Hurricane Harvey as the tropical storm is expected to cut about a quarter of America’s refining capacity. There had been some expectation ahead of the storm that US production would rise to 10 million barrels per day by the end of the year, a level of output that has not been seen in several decades. It is expected that Harvey will continue to impact gasoline and oil prices, although the initial reaction has been somewhat contained.

The Energy Information Administration reported a larger than expected decline in oil inventories in the week to August 25th although little volatility was seen as a result of the report. The EIA reported a decline of 5.4 million barrels against the analyst consensus for a draw of 1.9 million barrels and against a prior draw of 3.3 million barrels.

The latest COT positioning report revealed a notable drop in net long NYMEX crude oil positioning as bears aggressively re entered the market. Non-commercials held crude net long by 365,865 contracts in the week to August 29th, down from 445,448 contracts in the prior week. A bulk of the week over week shift is attributed to a rise in short positioning from 231,381 contracts to 297,448 contracts while the gross long declined by 13,516 contracts.

This week’s draw in positioning was the fourth consecutive weekly decline although the drop was significantly larger than prior weeks and oil prices are once again held net long near the lowest levels seen this year. USOIL made a technical break around the middle of the month, breaking below a rising trend channel that originates from the low posted in June. A declining trend channel has contained price action from the early August and the upper line of the trend channel was tested on Friday’s close.

While the combination of the rising trend channel break and the declining trend channel in play signals further downside for oil prices, the larger time frames offer a mixed signal. On both a weekly and a monthly chart, USOIL has held above its 200-period moving average despite dropping below it on an intra month or intra week basis. On a monthly chart, the last time oil prices traded below the indicator was a year ago.

Early week price action will be important as a break above the upper line of the declining trend channel seen on a 4-hour chart can signal a broader recovery. Important resistance in the event of an upside break is seen at $48.82 as a horizontal level falls within proximity of a declining trendline that originates from a high posted in late February. The same trendline triggered the turn that took place around late July to early August. Downside support for oil prices at $45.47 is a respected price point that has has been in play since May.