November crude oil futures finished the week slightly lower on fears that slowing global economic growth will curtail demand. Not only was the week lower, but the quarterly loss was one of the largest in at least two years.
The strong rally in the U.S. Dollar fueled the break as Europe’s debt crisis continued to worsen. The possibility of a default by Greece was also a major weight on crude oil prices. The rise in the Greenback encouraged investors to flee commodities priced in dollars.
Despite building negative sentiment, crude oil has held up quite well compared to other asset classes, namely industrials metals like copper and silver as well as equities. From a global perspective, demand from emerging markets like China and India is helping to hold the nearby futures contract above the September low and the May 2010 bottom.
The key to this week’s market will be whether these major bottoms continue to hold in the face of growing nervousness about a weakening global economy. The close near the bottoms at 76.61 and 76.25 make these two prices easy targets especially if the rout continues in the equity markets.
Longs have to be nervous at current price levels and are likely to throw in the towel on their positions if these bottoms fail. In addition, short-traders could be smelling blood in the market, leading to the possibility of renewed selling pressure once these prices are taken out.
Technically the main trend is down on the weekly chart. Traders have to be careful selling weakness through the last main bottom at 76.61 because of the May 2010 bottom at 75.25. Once these prices are cleared, the market is likely to acceleration to the downside.
Downtrending resistance from the 101.39 top is at 81.39 this week. A trader through this level may be a sign of developing strength, but a close over this angle will be more important. It is possible that a support base could begin forming; however, the trend is not going to change to up until the September swing top at 90.69 is violated.
Factors Affecting Crude Oil This Week:
• European Debt Crisis – Not only does Europe have to worry about a default by Greece, but it must also deal with a potential banking crisis and the possibility that the Euro Zone nations have not pledged enough money to combat money problems in Spain, Italy and Portugal. This is going to continue to underpin the Dollar, leading to pressure on the crude oil market.
• Greek Default – The uncertainty regarding whether Greece will default or not continues to hold the financial markets hostage. Speculators and investors are likely to refrain from buying until they can be certain that the fundamentals regarding this event have turned favorable. Although a complete default hasn’t been ruled out, there is still the possibility of a partial default. It’s difficult to see why any speculator would take a long position with conviction with this issue continuing to hang over the markets.
• Supply and Demand - Last week’s EIA inventory report showed an increase of 1.9 million barrels from the previous week. Even more significant is the fact that the figure was above the upper limit of the average range for this time of year. This could be read as a breakout to the upside, meaning that an uptrend in supply is beginning to develop. This is a potentially bearish development.
The poor close for the week and the quarter are signs that short-traders have taken control of the crude oil market. The recent two-sided volatility makes it appear that the heavy selling pressure hasn’t begun yet. This could occur if the market takes out a pair of bottoms at 76.61 and 76.25.
By. FX Empire
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