Following a volatile trading week which saw the October Crude Oil futures trade in 13.18% range, the market settled at $85.69, down $1.61 or 1.84%.
The week started out with a violent sell-off as market participants reacted to the downgrade of U.S. debt instruments by the S&P Corp. Once it settled down, traders looked to the lingering debt situation in the Euro Zone and the U.S. Federal Reserve for direction.
On Tuesday, the Fed announced that it would keep interest rates at near zero until mid-2013. Although there was a short-covering rally about mid-week, traders could not turn the market higher because of the uncertainty regarding the strength of the U.S. economy.
Throughout the week, the crude oil market reacted in both directions as equity prices swung in a huge range. Volatility was also driven by on-again, off-again speculation that European leaders would finally agree on a long-term solution to the sovereign debt issues in the Euro Zone. Some stability was returned to the Euro that weakened the U.S. Dollar after the European Central Bank began buying Italian and Spanish debt. The weakness in the Dollar may have helped put a floor in the commodity markets including crude oil.
Surprisingly, at mid-week the weekly inventory number played a major role in the crude oil markets stability. A report was issued suggesting that tight global supplies will need to be drawn down further in the second half of the year to meet demand. Despite this forecast being more optimistic than what the Fed was telling everyone, crude oil bottomed and the market firmed into Friday’s close. In order to sustain any kind of strength, the global economy has to continue to show improvement. Any sign of a slow down and crude oil prices are likely to be back down in the lower 70’s.
Technically October crude oil is in a downtrend on the weekly chart. The rebound in the market last week began near the week-ending May 28 bottom at 74.89. The short-term range is 101.00 to 76.15. This makes 88.58 to 91.51 the next likely upside target. This retracement range is likely to act as a pivot zone. Regaining this area will be bullish, but first, trend traders are likely to sell into this zone on the first test.
Factors Affecting Crude Oil This Week:
• Stock market volatility. Volatile swings in the equity markets are likely to have a major impact on crude oil prices this week. Look for crude oil to mirror the moves in the equity markets as traders are likely to continue to switch from risk off, to risk on scenarios throughout the week.
• Crude oil inventory. Following last week’s reports from the International Energy Agency, the U.S. Energy Information Administration (EIA) and the Organization of Petroleum Exporting Countries (OPEC) calling for continued global oil-demand growth this year, traders are going to be looking for proof in the weekly inventory numbers. Expect the market to react strongly to this week’s supply/demand report on Wednesday.
• U.S. Economic Reports. August 15 will feature Empire Manufacturing, Net Long TIC Flow, and the NAHB Housing Market Index. On August 16, traders will be focusing on Housing Starts and Building Permits. Traders want to see if these numbers are pointing toward growth or perhaps another recession.
• European Debt. Signs last week that Euro Zone governments led by the actions of the European Central Bank were close to a long-term solution to the sovereign debt crisis helped stabilize crude oil last week. This action is generally supportive for the Euro while potentially bearish for the U.S. Dollar. Crude oil could rise if the Dollar weakens along with other Dollar-priced commodities.
• European Downgrade. The wildcard this week is the possibility of a downgrade of the debt of several European nations especially France. Traders are particularly concerned about debt issues facing French banks.
By. FX Empire
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