September Crude Oil futures finished the week at a six-week high, slightly below the psychological $100 level. The late session rally on Friday was driven by demand for crude oil products after a series of events earlier in the week provided solid support.
Among other factors driving crude oil higher was the widening of the discount of WTI crude to Brent crude which increased to nearly $19 per barrel. The movement in this spread lead to strong buying in heating oil and gasoline.
Earlier in the week while crude oil was locked inside its two-week range, Euro Zone leaders approved a second bailout package for Greece. This action sent the Euro sharply higher, pressuring the U.S. Dollar. All Dollar-priced commodities rose on the news including crude oil.
Initially, crude oil was supported by the news that Greece would be given its much needed aid after Euro Zone leaders agreed to give the rescue fund broader powers to prevent contagion. The key to sustaining this plan will be placing more burdens on private debt holders.
Although the rescue plan was approved, Greek bonds are still expected to remain at low speculative grade at best according to the rating services. Therefore the bailout appears to be a short-term solution rather than the longer-term plan that many investors were looking for. By Friday, the euphoria which had been driving the Euro higher along with crude oil prices had subsided as traders focused on whether the rescue package would stop the sovereign debt crisis from spreading throughout Europe.
Also helping to underpin the crude oil market was optimism that a solution would be reached to avoid a U.S. debt default on August 2. At the close of the week the market was trading as if there was going to be a compromise over spending cuts proposed by Republicans while Democrats led by President Obama felt the debt ceiling would be raised. The current proposal calls for $3 trillion in spending cuts over a 10-year period. The Democrats are opposing some of the cuts and feel that an extension of the debt ceiling should be the top priority at this time.
Technically, September Crude Oil took out the recent top at $99.87 without much fanfare. The move through this level took place without any follow-through buying although the strong close still has the market in a position to challenge a major 50% price level at $102.89. On the downside, $95.18 to $94.00 remains a solid support zone.
Beside the friendly price action, the news that professional traders raised their net long crude oil positions by 13, 453 to 182,825 contracts provided a bullish undertone.
Factors Affecting Crude Oil This Week:
• Events over the week-end suggest that the U.S. debt extension debate is going to dominate the crude oil market this week. The news that the Republicans pulled their proposal off the table suggests that politicians are far from solving this potential crisis. Traders could be facing a “risk off” scenario on Monday, driving down risky assets such as commodities and equities. The safe-haven Dollar is expected to gain, putting pressure on crude oil.
• There are still lingering issues regarding the Greece bailout plan that may adversely affect crude oil. Traders are still worried that the short-term nature of the plan will not be enough to stop contagion. This could pressure the Euro while supporting the Dollar. A higher Dollar means lower crude oil prices.
• Wednesday’s supply and demand report is expected to show additional drawdowns in inventory. Traders should be aware that possible supply disruptions in Saudi Arabia and Libya are still major concerns.
• If one removes the U.S. debt ceiling problems from the equation then the supply and demand fundamentals support higher crude oil prices. The widening of the spread of Brent crude over WTI is enough to support higher prices.
By. Commodities Mansion
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