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Crude Oil Analysis for the Week of November 14, 2011

January Crude Oil finished sharply higher for the week, settling well above a key 50% support at $95.29, but below 61.8% resistance at $99.99. Additional Gann angle support is at $99.36 this week. The next important upside target is a downtrending Gann angle at $101.23.

The $99.36 to $99.99 combination should act as a pivot zone, controlling the market’s short-term direction. Since the steep Gann angle moves up at a rate of $4.00 per week. This market is going to have to close above $103.36 on a weekly basis in order for it to maintain its torrid upward pace.

Bullish traders will want to see the market continue to hold $99.36 this week. Since last week’s close was at $98.99, the market will have some catching up to do early in the trading session. A failure to regain the steep uptrending angle will be another sign that buyers are lightening up their positions and that sentiment may be shifting to the downside.

It sounds complicated, but it’s not. This market is being driven by momentum at this time. A slowdown in momentum will show up on the charts and will be the first indication that an overdue correction is about to begin. Traders have to watch for this momentum shift because the market is vulnerable to a correction of its rally. The first downside target is a 50% price level at $87.28.

Fundamentally crude oil is being driven higher by a combination of economic and external events. From an economic standpoint, the market was boosted by a weaker U.S. Dollar and a slight easing in the uncertainty over conditions in the Euro Zone. Political changes in Greece and Italy helped fuel a shift in sentiment late in the week, driving up demand for risky assets.

Earlier in the week crude oil’s link to the Euro was demonstrated after the yield on Italian 10-year government bonds surged to a new lifetime high of 7.48%. Crude oil prices plunged sharply lower on Wednesday, but this loss was regained after Italy’s Parliament on Friday approved an amendment to the country’s 2012 budget regarding new austerity measures. This then allowed for the resignation of Prime Minister Berlusconi without having to go through a long, drawn out process.

Political and economic conditions also improved in Greece after new Prime Minister Papademos approved the country’s latest austerity plan and accepted the terms of the Euro Zone’s 130 billion Euro bailout proposal. This action helped turnaround the Euro late in the week, giving traders the confidence to buy riskier assets like equities and commodities.

A couple of U.S. economic events also helped boost energy prices. On Friday, preliminary data showed that U.S. consumer sentiment rose to its highest level in five months in November. A drop in U.S. jobless claims also helped contribute to demand for higher-yielding assets. It appears that the U.S. economy is holding steady just waiting for the situation to improve in Europe.

Last Wednesday, the U.S. Energy Information Administration reported that U.S. crude oil inventories fell by 1.4 million barrels the week before to 338.1 million barrels. This came as a surprise since analysts were looking for an increase of about 0.5 million barrels. A report that China imported 29.6% more crude oil in October than last year was also a sign of an improving global economy.

Finally, early last week the U.N. reported that Iran was producing weapons grade Uranium like for its military operations. This fueled talk of an impending embargo of Iranian crude oil. Any disruptions in the supply chain will be bullish for crude oil prices, given the tight supply/demand situation.

All of the key fundamentals support higher prices, but traders will have to deal with the reality that many of these factors have already been priced into the market. The key to higher prices will be whether shorts will continue to be pushed out of the market and if buyers will continue to demand crude oil at such lofty price levels.

The fundamentals say yes, but the charts say the market is vulnerable to a near-term correction because of overbought conditions. Bullish traders should approach the market with caution as it approaches the psychologically important $100 per barrel level.

Factors Affecting Crude Oil This Week:

Supply and Demand:  With economic conditions improving in the U.S. and conditions getting better in Europe, demand for crude oil is expected to increase. This is likely to show up as a drawdown in U.S. inventory this week. Weekly inventories are going to have to continue to decrease to support $100 crude oil.

European Sovereign Debt:  Conditions seem to be improving in the Euro Zone because Italy and Greece have agreed to play by the rules. This will allow the European Union finance ministers to work on raising the money it needs to fund any future bailouts. The unknowns remain Spain, Portugal and Ireland. Will problems arise in these countries which trigger another setback?

U.S. Economy:  This week’s key reports include consumer inflation, producer inflation and retail sales. All are major reports tied to the strength of the U.S. economy. Traders will be watching for growth since this will be linked to any future decisions by the U.S. Fed to implement additional quantitative measures.

By. FX Empire

FXEmpire.com is the Forex flagship site of the FX Empire Network. The FX Empire Network provides readers with the most expert and most timely technical analyses, fundamental analyses and news-pieces; this in order to empower them to make for themselves the best possible financial decisions. The FX Empire Network’s other flagship sites include: StocksEmpire.com and CommoditiesEmpire.com.




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