Weekly April crude oil posted a potentially bearish closing price reversal top last week. This formation typically leads to a 2 to 3 week break equal to at least 50 percent of the last rally. The key to this pattern’s success is the follow-through to the downside. A break through $104.84 will confirm the chart pattern and set up a possible break to $103.18 by the week-ending March 17. This doesn’t appear to be much, but a move through this level could set up a further decline into the 61.8 percent retracement level at $101.44.
Last week’s crude oil break was fueled by the strong U.S. Dollar and published remarks by President Barack Obama. The dollar rallied sharply higher last week as traders positioned themselves before reports this week that may show solid U.S. economic growth. Since crude oil is priced in dollars, any rise in the Greenback makes it more expensive, thereby limiting demand. Stripping out speculation caused by outside factors, this is what traditionally drives the crude oil market.
President Obama helped weaken the crude oil market after he told the Atlantic magazine that a pre-emptive strike on Iran might generate “sympathy” for the Persian Gulf country. His statement eased concerns that an attack would take place, leading speculators to pare their long positions. He further added that he did not want to portray Iran as a victim.
Although crude oil prices retreated to close out the week, earlier in the week speculators continued to drive the market higher. At one point last week, crude oil was surging on rumors of an oil pipeline explosion in Saudi Arabia. Saudi officials later denied the reports and price retreated. This would have been a key development since Saudi Arabia is reportedly supplying the global community with additional oil to make up for the short-fall caused by Iran’s decision to stop selling to certain European nations.
With President Obama making his stance clear to speculators, the unknown factor next week will be whether Iran responds with rhetoric of its own. Additional saber rattling by the Middle Eastern nation may stabilize the market, but depending on the strength of the threat, a rally is not expected.
With the fundamental factors easing, the technical chart pattern is expected to control the short-term direction of the market. Based on the potentially bearish technical reversal top, traders should look for initial downside pressure next week. A stronger Dollar may also pressure prices. Traders should note that this break should be considered corrective in nature and not trend changing. This means that fresh buyers may be waiting slightly above the psychological $100 barrier.
Factors Affecting Crude Oil This Week:
Geopolitical Events: Some of the wind was taken out of the sails of speculators last week when President Obama said the U.S. would not initiate military contact with Iran. This contributed to the selling pressure in the market. Iran could counter with fresh “tough talk” which could cause the market to stabilize.
European Sovereign Debt Crisis: This was not too much of a factor last week although the Euro weakened after banks borrowed more money than expected from the European Central Bank. This helped contribute to the stronger Dollar which eventually pressured crude oil.
Supply and Demand: Despite talk of an improving U.S. economy, demand has been relatively low. Next week’s U.S. Non-Farm Payrolls report will be watched closely. A better than expected report could lead to increased demand for crude oil, but this may not show up in the supply and demand reports for weeks. At this time, it looks like the strength of the Dollar will determine whether there is a pick-up in demand.
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