After forming a two-week support base between a pair of retracement levels at $94.98 and $90.13, August Crude Oil surged early last week, triggering a quick rally into a steep down-trending Gann angle at $95.52 this week. Overcoming this angle next week could set up further upside action with the retracement zone of the $115.52 to $89.62 range at $102.57 and $105.62 the next potential upside targets.
Last week’s rally stopped short of the psychological $100 resistance level at $99.42. If this becomes the short-term top, then look for a retracement to the downside of the short-term rally from $89.61 to $99.42 at $94.52.
Supply and Demand were the factors driving the crude oil market early in the week. The strong rally in the equity markets and the Euro triggered a “risk-on” rally as speculators bought higher yielding assets. Consecutive drawdowns in weekly oil inventory stocks also drove prices higher as traders gave up on the notion that the recent release of crude oil from the Strategic Petroleum Reserve would produce an excess supply on the market.
Beside the friendly U.S. inventory report, speculators were also driven to the long-side on the prospects of a better outlook for the economy because of the surprisingly strong API Employment report on Thursday. Traders were basing their bullishness on the possibility that a turnaround in the U.S. economy would fuel greater demand for crude oil and its products.
As of Thursday’s close, conditions seemed ripe for a continuation of the rally on Friday as all the technical and fundamental cards were lining up for a follow-through rally. This was not to be as an excessively weak U.S. Non-Farm Payrolls report on Friday took the steam out of the market, giving bullish traders an excuse to peel off some of their positions.
The U.S. jobs data woefully missed pre-report guesses of 115,000 by coming in at 18,000. This report highlighted the fact that the U.S. economy was either coming to a standstill or reversing its recent upside momentum. Trader confidence could be eroding on the heels of the end of the Federal Reserve’s stimulus program in June and the prospect that the U.S. budget increase deficit vote is going to go down to the wire in early August.
Oil traders will be putting a lot of weight this week on last week’s employment data because the data closely correlates with demand for crude oil and refined products. If trader sentiment turns negative on the economy, then look for oil to get pressured. One sign that the market has discounted the unemployment number will be a rally in the stock market. This will indicate a “risk-on” scenario which is likely to be supportive for oil prices.
Traders will also be watching develops in the Euro Zone. Lingering sovereign debt issues are at the forefront once again as rising bond yields and the cost to insure debt are indicating that more problems on the horizon. Traders will be particularly interested in Italy’s debt situation especially since European banks’ stress test results are due this week.
Factors Affecting Crude Oil This Week:
• The performance of the global equity markets will be an important factor to watch this week. Friday’s weak U.S. employment report sent the indices sharply lower early in the session before they recovered into the close. Oil traders will be following equity prices closely since they tend to discount future events. Higher stock prices generally mean the economy is likely to improve in the future. This should spark a rally in crude oil because of thoughts of increased future demand.
• Oil inventory reports will also be watched closely to see if the drawdown trend continues. Last week’s loss of 900,000 barrels was below the weekly estimate of a loss of 2.5 million barrels, but the market shrugged it off because of other bullish factors. The perception of increased demand for gasoline over the 4th of July week-end may mean that traders will be looking for a decline in oil stocks this week.
• The euphoria triggered by the passing of Greek austerity measures helped drive the Euro higher, triggering increased demand for risky assets. The U.S. Dollar was also pressured at that time. Traditionally, a lower Dollar means higher commodity prices. This week traders will be watching the relationship between the Euro and the U.S. Dollar. Should sovereign debt concerns continue to escalate in the Euro Zone then look for greater demand for safe-haven currencies like the U.S. Dollar. Should this occur then look for oil to feel pressure.
By. Commodities Mansion
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