By Ric Spooner, Chief Market Analyst, CMC Markets Australia In a case of deja vu all over again, oil rallied 10% on Monday and Tuesday in expectation of lower US production, only to have its hopes dashed neatly at chart resistance last night. This was a repeat of early February when declining US rig counts had traders anticipating a cut in US production. These hopes were unfounded and by Mid-March price had retreated to make new lows. The rig count is a data set that’s entered the arcane world of the trader only recently. The number of oil rigs operating in the US has halved in recent months and now stands at 802 compared to 1609 in October. However this has yet to lead to any reduction in production. Last week it remained stubbornly high at 9.4m barrels per day. Two reasons have been advanced for this. One is the delay between declines in drilling and actual reductions in production. The other is that the improving efficiency of rigs has partly offset the impact of the smaller number of rigs. However, last night’s disappointment may yet prove to be temporary. Analysts estimate that with only 800 rigs in use, oil production will decline. Bank of America for example, estimates that between 1000 and 1200 rigs would need to be operating to keep US oil production at current levels over coming months. Another possibility is that the US could actually run out of storage capacity, forcing a cut in production. Over the past 13 weeks inventories have grown by 100m barrels and now stand at 482m. All this begs the question of whether some reduction in US production will actually be enough to help the oil price much anyway. The Saudis are pumping out 10m barrels per day and the threat of around 1m Iranian barrels coming back on the market looms if sanctions are lifted. Oil chart Last night’s sell off confirms a trading range in the West Texas Oil price. The top of the range is now clearly defined at around $54 by the December lows plus the highs of both February and this week. It looks like it’s going to take some tangible good news to push oil past this level. The bottom of the range is the support of a gently sloping trend channel that now intersects around $41. At this stage, the anticipation of an eventual cut in US production looks likely to prevent oil falling below this support. But if we do get some good news on US production in coming weeks and a clear break through the $54 resistance follows, how much upside is there? The big inventory overhang and the Saudi strategy of defending market share imply the scope for a rally is limited. Too much of a rally would also be self-defeating in any case, encouraging a rebuild in US production. Against this background, the retracements on the chart below look like levels to keep in mind. These represent retracements of the last major downtrend. The first is a 38.2% Fibonacci retracement at around $55.70. The second is a 50% retracement at around $59.90. Source: CMC Markets CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.