Crude Oil Has Room to Run

Bullish crude oil traders are enjoying a good week after a perfect storm of events helped drive out weaker short-sellers and draw the attention of speculative buyers. As of Thursday’s close, both U.S. West Texas Intermediate and international Brent crude oil are in a position to finish the week up over 4 percent.

The foundation for a rally was laid early in the week. Once this story came out, the selling dried up. Now it just became a matter of time before the news would trickle down from the professional trader to the small speculator.

Crude oil prices stabilized early in the week after it was reported by Reuters that over the week-end a joint committee of ministers from OPEC and non-OPEC producers had agreed to review whether a global pact to limit supplies should be extended by six months.

Another piece of information suggesting a bottom may have been reached came from the U.S. Commodity Futures Trading Commission. Its latest positions report showed speculators were still unwinding long positions. However, the data also indicated that long positions as of March 21 were at their lowest since December. This was a potentially bullish development because it meant that there was room for new buyers.

Despite the potentially bullish news from OPEC and the CFTC, there was still no compelling reason to want to buy crude oil. There seemed to be enough information to stop the selling, but bullish investors were still waiting for that one piece of news to convince them that prices were undervalued.

Another piece of the bullish puzzle hit the markets on Wednesday when Libya announced supply disruptions. According to Reuters, a source from the National Oil Corporation said that oil production from the western Libyan fields of Sharara and Wafa had been blocked by armed protesters, reducing output by 252,000 barrels per day (bpd).

Later in the session, fresh data from the U.S. Energy Information Administration showed crude oil inventories rose 867,000 barrels in the week-ending March 24. This figure was nearly half of the 1.2 million barrel build that was expected.

Finally, on Thursday, oil prices jumped after Kuwait oil minister Essam al-Marzouq said his country was among several member and non-member nations supporting the extension of the pact to limit output, trim excessive supply and stabilize prices, according to state news agency KUNA.

Given this perfect storm of bullish events I’m looking for crude oil to extend the rally into next week. Additionally, last week’s steep drop in gasoline inventories, coming at the end of the refinery maintenance season, likely means crude oil inventories are on the cusp of declining.

I’m looking for shorts to continue to cover their positions and light speculative buying. The OPEC extension story will be enough to drive oil prices back into old bottoms, but if Russia announces it is on board for the extension and additional production cuts then we could see a strong breakout to the upside.