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Crude Oil: The bearish narrative falls out of favor

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As Crude Oil prices continue to chug along higher, the hitherto bearish narrative surrounding OPEC producers is clearly turning into a broken record. Oil prices are steady for nearly 3 months, make that four if you count the doji close in February, after prices fell to 12-year lows of $26.05.

While the first half of the year saw a continued decline in Oil prices supported by fundamentals such as increased production of oil from countries like Russia and Saudi Arabia as well as Iran returning to the international oil markets, the technical landscape was showing a different story. Since the trough at $26.05 and prices eventually closing out February at $33.75, NYMEX Crude Oil has gained 45.14% by May’s end.

Failed Doha meetings and a no outcome from the June 3rd OPEC meeting should have seen Oil prices trending lower, but supply disruptions helped to ease the pain. Even the lack of unity among the oil producing nations failed to stem the tide in the price rally. The wildfires in Canada, which knocked out the Oil sands producers alongside on and off disruptions in Libya and Nigeria, all seem to be adding up, in hindsight of course. On the other hand, OPEC members continued to maintain that the markets will rebalance itself is starting to look true. On a year to date basis, NYMEX Crude Oil is up 37.69%, but it’s still a long shot away from the $100, although the $50 psychological level is starting to look like the new norm.

On the other hand, the week to week crude oil inventory report from the US has shifted its trend with the weekly drawdown in crude oil stocks now becoming a common theme. This week, the API’s Crude oil inventory report showed a drawdown of 3.56 million barrels for the week ending June 7th, 2016. For the same period, the official EIA crude oil report showed a drawdown of 3.22 million barrels, which marks a third consecutive month of drawdown in inventory.

API Crude Oil Inventory for week ending June 7th 2016
API Crude Oil Inventory for week ending June 7th 2016
EIA Crude Oil inventory for week ending June 7th 2016
EIA Crude Oil inventory for week ending June 7th, 2016

This week’s drawdown is seen as a result of supply disruptions plaguing Oil supplies from Nigeria. Besides the shifting fundamentals, the weaker US dollar alongside reported increase in oil imports from China are being seen as some of the many reasons behind the Oil price rally.

Crude Oil – Technical Outlook

The weekly chart for Crude Oil shows prices continuing their rally having cleared the 44.80 – 43.40 support. To the upside, the Oil price rally could see extended gains targeting 54.80 – 55.80 region, which marks an unfilled gap on the charts. However, the continued hidden bearish divergence remains a key factor, more importantly for weaker long positions.

WTI Crude Oil ($51.51) – Price well poised for more upside
WTI Crude Oil ($51.51) – Price well poised for more upside

The weekly resistance level noted on chart sits in confluence with the bullish flag on Crude oil which was mentioned in last week’s report. Although oil prices failed to dip to $46.77, momentum has managed to keep prices well supported. Any dips from current levels could see prices find support near $49.50 – $48.10, while to the upside, $54.80 – $55.80 is likely to come into focus over the near term.

WTI Crude Oil ($51.51) – Daily Chart, Bullish continuation seeks more upside
WTI Crude Oil ($51.51) – Daily Chart, Bullish continuation seeks more upside

To conclude, the upside is clearly in favor of WTI Crude oil. Support near 49.50 – 48.10 is likely to be tested, and any bounces off this level could see a continuation towards $54.80 – $55.80.

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