Oil Rally Undeterred By Bearish News

US West Texas Intermediate crude oil futures are trading lower on Friday, but are still up for the week. This week’s rally is being fueled by a combination of a bullish technical chart pattern and mixed-to-bullish fundamentals.

The technical chart pattern is pretty clear. After erasing the “war premium”, bullish traders found value at $92.20. Now they are looking for a fundamental event that could launch a breakout to the upside.

The fundamentals are mixed, but still leaning toward the bullish side. The theme this past week has centered on supply. Early in the week, bullish traders bet on a pipeline disruption at the Kazakhstan CPC crude terminal and the possible imposition of an oil embargo on Russia.

However, as the week progressed, news of a partial export resumption from Kazakhstan’s CPC crude terminal and split vote on whether to embargo Russian oil began to weigh on prices.

Additional bearish factors also began to pile up with traders starting to price in a potential nuclear deal between the US and Iran, which could lead to the release of more supply. Prices were also pressured by the potential for another coordinated release of oil from storage by the United States and its allies to calm oil markets.

In another potentially bearish development, responding to market volatility, the Intercontinental Exchange (ICE) raised margins for Brent futures by 19% for the May contract from Friday, the third rise this year.

Futures…

US West Texas Intermediate crude oil futures are trading lower on Friday, but are still up for the week. This week’s rally is being fueled by a combination of a bullish technical chart pattern and mixed-to-bullish fundamentals.

The technical chart pattern is pretty clear. After erasing the “war premium”, bullish traders found value at $92.20. Now they are looking for a fundamental event that could launch a breakout to the upside.

The fundamentals are mixed, but still leaning toward the bullish side. The theme this past week has centered on supply. Early in the week, bullish traders bet on a pipeline disruption at the Kazakhstan CPC crude terminal and the possible imposition of an oil embargo on Russia.

However, as the week progressed, news of a partial export resumption from Kazakhstan’s CPC crude terminal and split vote on whether to embargo Russian oil began to weigh on prices.

Additional bearish factors also began to pile up with traders starting to price in a potential nuclear deal between the US and Iran, which could lead to the release of more supply. Prices were also pressured by the potential for another coordinated release of oil from storage by the United States and its allies to calm oil markets.

In another potentially bearish development, responding to market volatility, the Intercontinental Exchange (ICE) raised margins for Brent futures by 19% for the May contract from Friday, the third rise this year.

Futures margin rates are increased when markets are volatile and the move makes transactions more expensive because it forces traders to increase the deposit they hold at the exchange for each contract to prove they can deliver on obligations. When margins rise, weak undercapitalized longs are forced to liquidate. If this occurs, this could put unexpected pressure on prices.

Weekly Technical Analysis

Weekly May WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart, however, momentum is trending lower, following the confirmation of the closing price reversal top from the weekend March 11.

A trade through $126.42 will negate the potentially bearish chart pattern and signal a resumption of the uptrend. A move through $61.86 will change the main trend to down. This is highly unlikely, however.

The minor trend is also up. A trade through $92.20 will change the minor trend to down. This will confirm the shift in momentum.

Retracement Level Analysis

The major resistance remains the longer-term retracement zone at $111.45 to $136.92. This zone was tested again this week with the 50% level at $111.45 straddled several times on the daily chart.

The first minor range is $126.42 to $92.20. Its retracement zone at $109.31 to $113.35 is providing resistance.

If the first retracement zone fails as support then look for the selling to possibly extend into the second retracement zone at $94.14 to $86.52. This zone stopped selling two weeks ago at $92.20.

The main range is $34.04 to $126.42. Its retracement zone at $80.23 to $69.33 is the major support zone.

Weekly Technical Forecast

The direction of the May WTI crude oil market the weekend April 1 will be determined by trader reaction to $113.35 and $109.31

Bullish Scenario

A sustained move over $113.35 will indicate the presence of buyers. If this move creates enough upside momentum then look for a retest of the closing price reversal top at $126.42.

Overtaking $126.42 will negate the bearish chart pattern and could launch a rally into the long-term Fibonacci level at $136.92.

Bearish Scenario

A sustained move under $109.31 will signal the presence of sellers. This could lead to another test of the retracement zone at $94.14 to $86.52.

If the selling pressure is strong enough to take out the minor bottom at $92.20 the shift in momentum will be confirmed.

Taking out $86.52 will indicate the selling pressure is getting stronger. This could extend the weakness into the major retracement zone at $80.23 to $69.33. This is an important value area so we expect to see new buyers show up on a test of this area. Furthermore, new buyers will be trying to defend the main bottom at $61.86.

Short Term Outlook

Technically, the market is struggling with the retracement zone at $109.31 to $113.35 as expected. In our opinion, trader reaction to this zone will determine the near-term direction of the May WTI futures contract.

The first sell-off from $126.42 to $92.20 was long-liquidation. The successful test of $94.14 to $86.52 attracted new buyers at $92.20. They recognized the zone as value.

The subsequent retracement into $109.31 to $113.35 ran into resistance. Aggressive counter-trend sellers are trying to stop the rally and form a potentially bearish secondary lower-top. Bullish trend traders are trying to drive the market through $113.35. They want to fuel a rally into $126.42 and possibly a breakout over this level with their sights set on $136.92.

Essentially next week’s direction comes down to this: Look for the upside bias to continue on a sustained move over $113.35, and for a downside bias to develop on a sustained move under $109.31.

The longer-term fundamentals are still bullish, but traders aren’t likely to chase the market higher unless there is a major blow to supply. In the meantime, gains could be capped by a US-Iran nuclear deal, additional supply from government releases and margin-call related sales.

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