After failing to pierce the previous week’s low at $104.29, May Crude Oil made a low at $104.50 and proceeded to rally sharply higher. The market still closed lower for the week, but the close near the high indicates that crude oil may be developing some upside momentum.
The short-term range is $110.95 to $104.29, making $107.62 a key pivot price. A breakout over this price and the market will be set up for further upside action. A failure at this pivot could mean the formation of a secondary lower-top which is often indicative of selling pressure.
There is no question the main trend is up with both the swing chart and Gann angles pointing toward the upside. The swing chart will not turn down unless the main bottom at $96.26 is violated. However, breaking the uptrending Gann angles at $104.26 and $101.53 will be signs that crude oil is beginning to weaken.
Besides the Gann angle support points, a 50 percent level at $104.26 and a Fibonacci retracement level at $101.53 are also possible support areas. In summary, technically the way of least resistance appears to be to the upside. Should the market begin to weaken, it looks as if a break could be labored because of the way the support areas are laid out.
Last week traders seemed to be content with pressing the crude oil market lower until the news hit the market that Reuters was reporting Iranian oil exports would drop by 300,000 barrels a day this month because of tighter sanctions. This was further proof that possible disruptions in supply are the driving force behind this market. Nymex crude oil prices actually jumped 3% in minutes on the news. Automatic buy and stop loss orders contributed to the surge that put prices at their highest level in three weeks.
President Obama also had something to say last week about crude oil prices. In an interview with auto club AAA he said, “Right now the key thing that is driving higher gas prices is actually the world’s oil markets and uncertainty about what’s going on in Iran and the Middle East and that’s adding $20 or $30 premium to oil prices.” Without a clearly defined energy policy, however, there is little the President can do about the situation other than tap the U.S. strategic reserve. Even that will offer only short-term relief as demonstrated in the past, most recently in April 2011 during the Libyan skirmish. In addition, flooding the market with excess oil is likely only to drive the market down a few dollars.
Early last week, crude oil prices were under pressure after Saudi Arabia announced it would increase production in order to restore ‘fair’ prices to make up the Iranian short-fall. This loss was quickly reversed on Wednesday, however, after the U.S. Energy Department said that crude inventories unexpectedly dropped 1.16 million barrels the previous week. Traders had been expecting an increase of 1.9 to 2.2 million barrels.
This week traders will continue to focus on the situation in the Middle East. Any news focusing on the supply side of the market could trigger a price spike. Peace is not expected to break out over the short-run, so the market is likely to be underpinned by the possibility that the situation will worsen.
We saw last week that Saudi Arabia can drive prices lower with a few words, but this is not likely to last as traders are going to expect more solid action from this major oil producing nation. In addition, talk of releasing oil from the U.S. strategic reserve has been done before so traders no what to expect. This means that the market’s near-term direction rests clearly on the actions by Iran.
Since no one is certain of its next move, money is going to continue to be on the long side of the market and sharp breaks are going to attract additional buying. With oil prices expected to rise over the short-run, gasoline prices are going to remain high. This is going to raise concerns of a U.S. recession. Once the economic numbers start to show signs of decline then traders can expect action from the government. But like I said this isn’t going to even be a factor. Until speculators decide to leave this market it is likely to continue to trend higher.
Factors Affecting Crude Oil This Week:
Geopolitical Events: Iran is the wild card since no one seems to be able to predict its next move. This should continue to raise uncertainty in the marketplace which will underpin prices and perhaps trigger price spikes. Panic could hit the market if oil regains the $110 per barrel price level.
U.S. Economy: The effects of higher crude oil and gasoline prices should begin to show up in the U.S. economic data. Its impact could eventually push the economy into a recession. With consumers spending more money on gasoline, retail sales could begin to suffer especially as we enter the U.S. driving season.
Supply and Demand: The U.S. supply and demand situation has been difficult to predict as seen in last week’s inventory data. Traders were looking for an increase and instead the government reported a drawdown. The consensus is that the U.S. has enough crude oil which leads me to conclude that speculation is the driving force in the market at this time.
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