February Crude Oil had a weak follow-through to the upside after a powerful rally the week before. The thin holiday trade was probably the biggest reason for the lack of follow-through. From a technical perspective, the feeble rally suggests that the strong rally from the week before was likely heavy short-covering rather than new buying. Buyers have been scarce lately because of the financial turmoil in Europe and the strength of the U.S. Dollar. Commodities priced in dollars tend to weaken when the greenback strengthens.
Not only was last week’s rally pathetic, but the market also closed lower for the week, suggesting low buying interest while setting up a closing price reversal top and a possible double-top formation. The daily chart has actually formed three lower tops at $103.28, $102.56 and $101.77. All of this could be indicating that a serious top may be forming.
Once again, the main reason for the hesitancy of the buyers may be skepticism over the fate of the Euro. Although demand has been strong, traders may have realized that the huge drawdown in oil stocks from the week before may have been end-of-the-year tax related buying rather than true demand.
Technically, as mentioned earlier, this week’s close at $98.83 was lower than the previous week’s close at $99.68. Besides the obvious reversal top, the market also closed on the bearish side of a Fibonacci retracement level at $99.73. Based on the main range of $114.57 to $75.73, the key retracement zone remains $95.15 to $99.73. While the close under the Fib level suggests weakness, a move under $95.15 will be an indication of emerging selling pressure.
Another indication of impending weakness is the close under the uptrending Gann angle at $101.73 this week. After holding above this angle moving up $2.00 per week, February Crude Oil has now finished three consecutive weeks under it. Unless the market can regain this angle, the market is likely to weaken. Putting it all together, the close under the angle, below the Fibonacci retracement level and the closing price reversal top are all indications of major topping action. A move through the swing top at $103.28 will reaffirm the uptrend, but a break under the newly formed swing bottom at $92.70 will mean the main trend on the weekly chart has reversed to down.
Fundamentally, this week’s U.S. Energy Department’s weekly inventory report showed an unexpected rise in crude inventories. A surge in imports was the main reason behind the jump. The report, which showed that crude inventories rose by 3.90 million barrels for the week-ending December 23, took traders by surprise. Their reactions, however, were not as robust as they were the week before when inventories fell by a massive 10.57 million barrels. Speculators should continue to watch for surprises in the weekly supply/demand report since Europe and talk of a global recession should continue to wreak havoc on the production and usage levels.
Last week Iran stirred the energy market pot a little when it began naval maneuvers in the Strait of Hormuz. The U.S. is keeping a close eye on the situation and will take military action if needed. Traders reacted to the initial reports by driving up crude oil prices however; the market subsided after the U.S. assured the energy community that it stood ready to defend the flow of oil out of the region. One reason why crude oil may linger around the $100 area is possible military action in the Middle East.
Factors Affecting Crude Oil This Week:
Supply and Demand:Traders have their eye on the U.S. Dollar and its influence on demand for crude oil. A stronger Dollar means more expensive oil. High priced oil could keep traders away from the long side of the market. This could keep pressure on demand. Analysts have been way off the past two weeks when assessing the current supply and demand situation. Traders should approach the weekly EIA report with caution since the “experts” can’t seem to get it right. This can only add to the volatility.
European Sovereign Debt Crisis:This is still a major issue for traders especially if it forces the Euro decisively under the 1.30 level. Traders could flock to the Dollar and away from higher-yielding assets. If it doesn’t trigger a near-term break then it should at the very least, curtail buying. Traders should also watch Europe for signs of a recession. This condition could spread quickly around the world, putting a damper on demand.
U.S. Economy: The U.S. economy is holding steady despite the shaky conditions in Europe. This may lead to steady demand. A deep recession in Europe will hurt the U.S. economy as well. This will lead to negative developments.
Middle East Conflict: Continue to watch the Strait of Hormuz. Iran is likely to continue to poke and probe the area as it tries to exert its influence on the U.S. and Europe because of the newly imposed U.N. sanctions. Although the U.S. military is expected to continue to talk, traders should watch the news for naval movement in the area.
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