September Crude Oil markets had a rocky week but still managed to close up despite another rejection of the psychological $100 per barrel level. Although the market see-sawed at times due to concerns about Euro Zone debt, the dominating story was Federal Reserve Chairman Ben Bernanke’s hints about a possible QE3 program.
Traders were focusing on the possibility of contagion in the Euro Zone early in the week as European Finance Ministers met to approve the next aid package for Greece. At the same time, concerns were growing that sovereign debt issues were mounting in Italy. All of these worries helped drive the Euro lower versus the U.S. Dollar, making commodities priced in dollars too expensive. These high prices brought in the sellers when crude oil was nearing the century mark.
Crude Oil began to rebound, however, on Wednesday on Fed Chairman Bernanke’s congressional testimony. When asked about the state of the economy, he stated that more economic stimulus may be necessary, but not imminent. This sent the Dollar down sharply, triggering a massive short-covering rally in most commodity markets including crude oil. The bearish comment for the Dollar, but bullish comment for crude oil caught many traders by surprise who thought that additional stimulus was a dead deal.
Despite ending the week with a weak fundamental outlook for the economy because of a poor U.S. Consumer Confidence report and a slowdown in manufacturing in New York state, oil futures finished strong, proving that the market was more focused on fresh economic stimulus than the state of the economy.
The current trading action in crude oil suggests it’s a “win-win” situation for bullish traders. An improving economy will mean greater demand for product while a dismal economy will likely mean more stimuli from the Fed.
Nearly overlooked by traders this week was the sale of the 30 million barrels of oil released from the Strategic Petroleum Reserve. Market participants treated this as old news as the sale had virtually no effect on market prices. Traders now feel that increased global demand along with limited output from OPEC and Libya are likely to be the forces driving oil prices during the second half of the year. Adding to the developing bullishness is the belief that the U.S. economy will mount a second-half comeback or the Fed will step in with additional money.
One more thing to note is the debate over the U.S. debt limit increase. Right now it seems the market is willing to let the politicians talk. There does not seem to be enough news to trade off since there is still time before the August 2nd deadline. Even though Moody’s and the S&P Corp. have threatened the country with a downgrade in its credit rating should the government fail to reach a solution by the deadline, crude oil traders did not react much either way.
Technically, the weekly chart indicates that $100 is the key level to the upside. Once this area is breached with conviction, September Crude Oil market is likely to move into the $102.89 to $105.89 retracement zone. On the downside, the retracement zone at $95.02 to $93.88 that stopped last week’s break is now deemed new support.
Factors Affecting Crude Oil This Week:
• U.S. economic reports will continue to be monitored this week. Housing permits and housing starts will be the focus. As mentioned earlier, a bullish report will underpin crude oil prices, but a bearish report will also be supportive because it could mean the Fed is getting closer to providing additional stimulus for the economy.
• Euro Zone sovereign debt issues will be watched closely next week because of their influence on the Euro’s relationship with the Dollar. A stronger Dollar will make crude oil more expensive. This is likely to attract selling pressure. A weaker Dollar will be bullish for crude oil prices.
• This week’s inventory reports are expected to continue to show drawdowns in oil stocks.
By. Commodities Mansion
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