Bearish Data, But No Oil Price Drop?

| February 27, 2015 | 0 Comments

WTI CrudeTechnical Signs Point To An Oil Price Bottom

Wednesday was a very interesting day in the oil market.  As you may know, the US Energy Information Administration (EIA) releases its weekly oil inventory report every Wednesday at 10:30 am EST.

This week’s report was rather shocking…

For the fourth week in a row, US crude stockpiles grew to a new 80-year high.  That’s right, thanks to an 8.4 million barrel build for the week of February 20th, inventories are a whopping 434 million barrels.

No doubt about it, the US is swimming in crude oil right now.

But here’s the deal…

The price of West Texas Intermediate (WTI) didn’t careen lower on the news.  In fact, the commodity ended Wednesday trading higher by $1.71 a barrel.

See for yourself…

Oil Price, A chart of WTI

The fact that oil rallied on such undeniably bearish news reveals something very interesting about the state of the oil market.

Let me explain…

Bearish Information, But No Price Drop

Ask any seasoned trader and they’ll tell you the same thing…

When a deeply oversold market fails to drop on bearish news, it’s a sign a bottom is near.

How does it work?

It’s really pretty simple.  Even though the oil market was faced with bearish information on Wednesday, there simply weren’t any sellers left to sell.  When traders realized it, they started buying the commodity, pushing it higher on the day.

Now let me be clear…

It would be irresponsible of me to say crude has officially bottomed.  But Wednesday’s price action is supportive and points to the idea that oil has already seen its lows for the year.

While there’s still a possibility we retest the $45 lows in the near future, the idea of oil dropping into the $30 range is looking more unlikely.

But this technical signal isn’t the only thing bulls have going for them…

More Clues For An Oil Price Bottom

Earlier this week, China revealed its manufacturing sector expanded for the first time in four months in February.  The flash HSBC Purchasing Managers Index (PMI) jumped to 50.1, which is better than the 49.7 reading from January.

This is good news for oil bulls because China’s manufacturing sector is expanding again.  In case you’re unaware, a reading below 50 signifies contraction, while above 50 points to growth.

Since China is the world’s second largest consumer of oil, you can easily make the case that global oil demand is strengthening.

Speaking of oil demand…

Saudi Arabia’s oil minister, Ali al-Naimi, just spoke to the press for the first time since December.  The brainchild of OPEC’s controversial production strategy said, “global crude demand is rising and the markets are calm.”

While it may not sound like much of a statement, to me it’s a sign the de facto leader of OPEC is getting tired of low prices.

Adding fuel to this theory are statements made by Kuwait’s oil minister, Ali al-Omair, earlier this month.  He said the surplus in global crude markets is weakening and that oil prices will continue to recoup losses.

How To Capitalize On A Rising Oil Price

Without question, the easiest way for the average investor to profit from rising crude prices is through the US Oil Fund (USO).  This widely watched ETF trades in lockstep with crude oil futures.

If you want more bang for your buck, consider the Proshares Ultra Bloomberg Crude Oil (UCO).  This leveraged ETF gives investors 2x the daily returns of the Bloomberg WTI crude oil subindex.

Just keep in mind that the UCO’s leverage is a double-edged sword.  If oil prices fall in coming weeks, UCO will lose value at 2x the rate of WTI.

Whatever you do, be sure to keep your downside risk in check with proper position sizing relative to your total energy portfolio!

Until Next Time,

Justin Bennett

BIO:  Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com.  With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them.  Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.

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Category: Crude Oil, Energy

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.