WTI Crude: Fresh Highs Reached Before U.S. Inventory Report

A new high has been reached even as this article is being written. WTI Crude has breached 104.0 and is now trading at around 20 cents above the 104 USD per barrel mark. This is the highest price the commodity has managed to reach since May 2012, and the mark of a bullish breakout from 98.0, which has been acting as a strong ceiling for price action in 2013.

The rally is also fundamentally supported – demand in crude oil has increased significantly, as evident by the sharp drop in the past week’s inventory numbers. The unrest previously in Syria and now also Egypt has provided upward pressure as concerns for a stable and smooth supply of crude oil take a beating.

The best evidence that demand in crude is increasing healthily is the fact that OPEC has increased output since July, but the price of Crude continues to remain highly bullish. Looking at Brent Crude, prices have also been rallying strongly for the past week.

Brent prices are definitely not as high as they were in early 2013, but we have cleared the 106.0 resistance convincingly, with price currently trading at 108.0. This solidifies the claim that global demand is increasing, as it shows that the price rally is not localized.

Earlier in the year we did see WTI rally, but the same gain wasn’t noticeable on Brent – and the end result was that price tanked significantly back in April. With both Brent and WTI moving in tandem, the current rally appears to be more sustainable as than it had been before.

Hourly Chart

That being said, it is impossible for price to move in a single direction without any form of reply/pullback. Looking at the short-term chart, we can see that such a potential pullback may be currently underway. Price is facing resistance from a Channel Top, while stochastic readings are Overbought and suggest that a bearish cycle may start soon. If technicals signals are correct, a move back towards the Channel Bottom, closer to 103.0, will be possible, but that will not necessarily invalidate the bullish breakout seen on the Weekly chart, nor even impair the current short-term uptrend, hence continuing to fit nicely into our long-term bullish narrative.

With the Department of Energy inventory report coming in later, during US hours, price may find the fundamental reason needed to push lower should inventories decrease less than expected. Analysts expect a decline of 3.2 million barrels, but the number may turn out to be smaller, considering that numbers almost never meet expectations exactly, with the last occurrence of this happening on 7th Nov 2012. Therefore i would also be reasonable to expect volatility.

This would also mean that price may also have the chance of breaking through the current rising Channel for a stronger bullish acceleration should inventory numbers fall more than expected. Given current bullish sentiment, it is entirely possible that we could see overreaction on bullish news, but under-reaction on bearish news.

The true bullish litmus test however, would be a case where price manages to breakout of 104.5 in spite of weaker inventory numbers. This would imply that bullish sentiment is very strong, but then again the resulting pullback may be equally if not greater as the rally would be based more on speculative rather than fundamental supports.

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