Crude Oil – Fall in Inventory Spark Speculations of Improved Demands

The West Texas Intermediate traded pushed a new March High after report from American Petroleum Institute showed that Crude oil supplies has shrank. This report is generally not as widely followed as the Energy Department official report which will be released later today, with analysts expecting a growth of inventories by 2.3 million barrels. The increase is attributed to higher OPEC output which is at the highest in 3 months during Feb due to larger output from Saudi Arabia and Iraq.

It is interesting to see WTI Crude rallying more than $1.50 per barrel on the news, especially since it runs contrary to the more popular Energy Department report. What is less unexpected, is the quick pullback that followed, as market realized that they have overextended themselves and return price back to the mild bullish equilibrium.

Hourly Chart

The rising Channel is an indication that inherent bullishness in Crude prevails. The pullback is now back along Channel Top, suggesting that price could still straddle along the rising trendline to trade higher. Stochastic reading is bearish with a recent Stoch/Signal bearish cross, but we should filter this signal as readings are heading lower with price levels marginally higher. This divergence would be a effective signal during a bear trend, but during a bull trend, it simply tells us that the short-term bullish momentum may have accelerated too fast, and is now slowing down – which is very different from a outright bearish momentum call. Furthermore, the overall chart shows higher highs and higher lows for Price Action, while Stoch readings are also forming higher lows, which paints an overall bullish picture despite what current readings are showing.

Daily Chart

Daily Chart is also mildly bullish, especially after bouncing off the 61.8% Fib retracement and clearing 50.0% Fib to temporarily put bulls on the initiative. The decline from 14th Feb High can be invalidated if price manage to clear the 38.2% Fib, but preferably clearing the 94.0 swing high back on 25th Feb may give us a stronger bullish signal. 95.0 which has been the support back in mid Jan may provide resistance against further upsides, and a break of the level puts bull on the driver seat to attempt to reignite uptrend since Dec 2012.

Fundamentally, Oil demand hasn’t change much. With the warmer seasons coming, consumer demand for energy products will certainly fall. On the corporate side, though Dow Jones Industrial and Transportation indices have been forging new highs, we saw Crude barely able to shake off the bearish bias. There is weakness in the demand, and increasing supplies will not help prices to stay elevated.

Nonetheless, technical momentum remains firmly up. In the monthly Short-Term Energy Outlook released yesterday, the US Energy Information Administration slashed its 2013 forecast for WTI prices. Expected average price is $91.92, down from previous month’s estimate of $92.81. Despite this, crude is still looking higher.

Such disconnect between technical and fundamental directions may result in a blowback in prices quickly should sentiment reverses. Hence traders may wish to keep a keen eye on direction of prices for current rally may easily turn into a bull-trap in such scenarios.

Upcoming Key News:
Energy Information Administration Crude Oil Inventories – 10:30am EDT

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.