Fundamental Forecast for USOIL: Neutral

Talking Points:

A complex charting pattern is aligning with a hurricane hurling toward the Texas coast, and traders seem confused. Take heart, it’s OK, and you’re not alone. A key driver of Oil demand has been refiners, which are aligned alongside the Gulf Coast of Texas (where this poor boy vacationed as a young man). Refineries have been preparing this week for a Tropical Storm turned Hurricane by limiting refining activity, which is reducing much of the demand seen in the Oil market. Friday’s EIA Crude Oil Inventory Report showed that U.S. Oil inputs (refining activity) are at record levels with a comfortable margin (~600,000bpd).

The production aspect of Oil in Texas is in West Texas, far and away from the hurricane. Additionally, Oil production is not expected to slow down where we could see a mismatch once again between supply, which is steady, and demand that is dropping as refiners prepare for the first hurricane of Harvey’s strength to hit Texas in 13 years.

Now, on to the charts. We’ve been watching last week’s extremes to anticipate where price will likely move. Last week’s low of $45.38 and last week’s high of $49.13. A break below $45.38 would open up a chart pattern known as a corrective triangle. The correction would be from the move from $50.20 to $45.38. A break below $45.38 would favor an eventual move to the lower $40/bbl zone where Oil consistently has found support. A break above $49.13 would invalidate this view. Until $49.13 is broken, I will now look lower as demand could be broken by Harvey sending gasoline prices higher, and Oil’s price lower. A temporary effect to be sure as these markets are often correlated, but traders should be on the watch for short-term Oil weakness if more refiners are taken offline than previously expected.