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Crude Oil’s Outlook based on Chart Indicators

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Aug. 5 2019, Published 11:20 a.m. ET

On August 2, WTI crude oil active futures rose 3.2% and settled at $55.66 per barrel. Just a day earlier, they saw their largest single-day fall in more than four years. Short covering may have been behind US crude oil prices’ recovery. Moreover, the US crude oil inventories report for the week ended July 26 was bullish. Lower US inventories level have supported oil prices. Until the U.S. Energy Information Administration’s data release on August 7, oil could be safe from a downfall. The EIA is set to report US crude oil inventory data for the week ended August 2.

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The current inventories spread indicates an upside for oil. The spread is the difference between US crude oil inventories and their five-year average. Last week, the S&P 500 (SPY) fell 3.1%. Both SPY and oil were impacted by Donald Trump’s decision to impose tariffs on Chinese imports. Whereas inventory data helped oil recover, slowdown fears hurt the S&P 500.

On Friday, WTI crude oil’s implied volatility fell with oil’s rise. Usually, this trend is a positive development for oil prices. As of 1:26 AM ET today, US crude oil prices had dropped more than one percentage point since last week. Again, slowdown fears can hurt oil prices. The iShares MSCI All Country Asia ex Japan ETF has fallen 1.2% today.

What the rig count says for crude oil’s outlook

Last week, the oil rig count was at 770, its lowest since February 2, 2018. Raymond James energy analyst Pavel Molchanov expects US crude oil production to slow because of falling prices and shareholders’ push for more capital expenditure discipline. After disappointing quarterly results, Whiting Petroleum lowered its production guidance for 2019, reduced its staff by 33%, and lowered its capex guidance significantly.

Another hindrance for US oil producers is the lack of infrastructure for natural gas transportation. Natural gas is often an outcome of oil exploration in the US oil shale industry. In April, natural gas prices in Texas fell below zero, meaning producers had to pay to remove the natural gas glut to continue producing oil. This factor may have also forced upstream companies to reduce oil production. For Permian Basin oil and gas producer Concho Resources, natural gas prices are crucial. CXO’s production is 37% natural gas.

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