September Crude Oil futures declined 1.8% to $95.70 on Friday after a weaker than expected U.S. GDP report signaled the economy may be growing at a slower than expected pace.
The U.S. Dollar also broke sharply on Friday, but crude traders shrugged off the normal upside reaction to this event, by focusing on the slow growth exhibited by the U.S. economy. Traders for the most part ignored the events in Washington regarding the U.S. debt ceiling issue.
Although the actual raising of the U.S. debt limit wasn’t a major concern, traders are worried that a bill may pass calling for severe cuts in U.S. spending. Following the lead from several global governments, the U.S. is considering making austerity measures a key requirement before allowing the debt ceiling to be hiked. Curbing government spending could hit the economy hard, lowering demand and sending crude oil prices to possibly the mid-$80’s. This week’s trading action also suggests that $100 is a solid resistance level.
Setting aside the weaker Dollar which had been the driving force behind higher crude oil prices the past few weeks, crude traders instead decided to turn their focus on the economy and the lack of growth. On Friday, it was reported that the U.S. gross domestic product grew at a rate of 1.3% during the second quarter. This was below economist estimates of 1.8%. News that first quarter GDP was revised downward from 1.9% to 0.4% also contributed to the sharp sell-off in crude oil.
Crude Oil demand for the remainder of the year is now a major concern for bullish traders. Based on government projections of an increase in demand of just 0.2% if GDP reaches 2.5%, traders are now projecting a drop to below $90 over the short-run.
This scenario is being supported by chart watchers also who, after this week’s key reversal down, are now looking for support to fail at the recent bottom at $90.17 for the September futures contract. At the close Friday, the market was finding support inside of a retracement zone at $95.40 to $94.16 and above weekly Gann angles at $95.17 and $92.67. Once these areas are breached, the market could go into a freefall with only the main bottom at $90.17 to stop it. If austerity measures are attached to the government debt ceiling bill then look out below.
Factors Affecting Crude Oil This Week:
• Crude oil traders will be focusing on the events in Washington regarding the passing of the bill to raise the debt ceiling. Speculators are watching to see if Congress approves a measure to raise the debt ceiling while calling for spending cuts. This could be bearish for crude oil prices since lower government spending means less crude oil demand.
• It’s hard to believe that traders will ignore a sharply lower Dollar; however, this is likely next week if the focus remains on the growth of the economy. At best, a weaker Dollar may slow down the rate of decline in the crude oil market. This scenario is based on speculation that one or two debt rating services will cut the debt rating of U.S. Treasury instruments, thus triggering a sharp sell-off in the Greenback.
• The crude oil inventory report is expected to show a drawdown in inventory in Wednesday’s report. This may continue throughout the summer if gasoline demand remains high.
• It’s hurricane season so traders should continue to monitor weather conditions in the Gulf of Mexico to see if they will have any impact on refinery output. So far there have been no slow downs. This event would likely trigger a short-covering rally which coincidentally would occur if the market reaches an oversold level.
• Technical traders should watch for bearish traders to go after $90 to see if they can trigger stop-loss orders and a possible acceleration to the downside.
By. FX Empire
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