Crude oil futures for delivery in March 15 [CLH15.NYM] traded down 9.6% to an intraday low of U.S. $47.95 per barrel on the New York Mercantile Exchange (NYMEX) on Wednesday before bouncing back and closed at U.S. $48.45 per barrel. The U.S. Energy Information Administration said U.S. crude stocks rose by 6.3 million barrels last week to 413.06 million barrels, the highest level in nearly 80 years.

The Crude Oil Volatility Index (OVX), traded on the Chicago Board Options Exchange (CBOE), surged 6.62% on Wednesday to an intraday high of 63.39 before pulling back and closed at 62.73, the highest level since September 2012. 

The OVX is a crude oil derivative which measures the market’s expectation of 30-day volatility of the United States Oil Fund ETF [NYSE:USO], primarily the near month WTI crude oil futures contracts traded on the NYMEX. In short, high OVX readings usually mean traders see significant risks that crude oil price futures will move sharply lower.

A classic short-covering rally for crude oil prices sparked on Friday as Baker Hughes [NYSE:BHI], one of the world's largest oilfield services companies, issued a report saying that the U.S. oil drilling rig count fell to 1,317 at the end of January, down 18% from the record highs of 1,609 set in October 2014. 

Hedge funds were scrambling to cover their short positions while they drove the crude price from an intraday low of U.S. $43.58 per barrel on Thursday to an intraday high of U.S. $54.24 per barrel on Tuesday, or a 21.5% spread.
OVX, which is normally traded in an inverse correlation with the crude price, also surged 15.9% since Friday to close at 62.73.

From a technical viewpoint, there was a warning sign that crude oil prices could be in serious trouble after the OVX made a confirmed double bottom reversal in October of last year. The OVX broke out of the 5-year falling wedge in mid-November 2014 and broke the 58.43 technical resistance level, or ~ 50% Fibonacci retracement this week.

Our take is that crude oil prices could be heading lower if the OVX starts to trade between the 50% and 61.8% Fibonacci retracement levels. It is hard to believe that crude oil prices can hit a bottom while the Saudis continue to pump 11.6 million barrels per day. 

The death of King Abdullah, announced last month, sparked speculation that Saudi Arabia could shift direction and prices. Most analysts, however, believe that the Saudi royal family will resist any sharp changes in policy.