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Crude Oil Market Analysis for the Week of March 12, 2012

By FX Empire | Sun, 11 March 2012 16:18 | 0

May Crude Oil futures posted a modest gain last week with better-than-expected U.S. economic news the catalyst behind the move. The market started out weak as follow-through selling fueled by the previous week’s technical closing price reversal top attracted some mild selling pressure.

By Wednesday the market had reached its low for the week after a weekly inventories report showed a smaller-than-expected increase. The Energy Information Administration said oil supplies increased by 800,000 barrels in the week ended March 2. This was below pre-report analyst estimates calling for an increase of 2 million barrels.

Also giving the market a boost last week was the better-than-expected U.S. Non-Farm Payrolls report. Traders reacted to the good news by driving up prices on Friday. This was in anticipation of greater demand due to expectations of a stronger economy. Although demand is still sluggish, an improving economy could be a positive influence on this key side of the fundamental equation.

Geopolitical events took a backseat to traditional fundamentals last week although President Obama reiterated his stance that a military strike against Iran by U.S. forces is still an option but only if provoked by the renegade nation. Negotiations between Europe and Iran also continued in an effort to ease tensions caused by Iran’s move to cut sales of crude oil to certain European nations.

Surprisingly, crude oil was able to post a small gain despite the strength of the U.S. Dollar. Typically, commodities priced in dollars fall when the Greenback rallies. Last week, however, due to the strong economic news, crude oil traders opted to ignore this correlation.

Although the market closed higher for the week, the close at $107.87 was not very impressive. Based on the short-term break from $110.95 to $104.88, the market settled below a minor retracement zone at $107.92 to $108.63. The rally to this level was most likely short-covering triggered by short-term oversold conditions.

The close below the retracement zone also corresponds with a close below an uptrending Gann angle that had held as support for 4 weeks. This set-up indicates tentativeness among traders. The lofty price level that crude oil is trading at could also be a factor discouraging traders from going long.

Two weeks ago May crude oil posted a potentially bearish closing price reversal top. The follow-through last week confirmed the pattern, but sellers still shied away from pressing the market. Now that crude has retraced at least 50 percent of the break, it is possible that sellers will return this week. Although past performance is no guarantee of futures results, the closing price reversal pattern is very reliable at producing 2 to 3 week breaks equal to at least 50 percent of the previous rally. If this pattern is controlling the market at this time, then traders can expect a correction to at least $103.61 by the end of next week.

Last week’s trading range was tight so traders should look for a little expansion this week. Downside pressure could control the trade if $108.63 can’t be penetrated on the upside. However, traders shouldn’t look for much downside movement until $104.88 fails as support. Gains may be limited by a stronger U.S. Dollar.

Factors Affecting Crude Oil This Week:

Geopolitical Events:  Iran is still a wildcard. President Obama’s comments two-weeks ago regarding military action seems to have had an effect on speculators who have chosen to pare positions while waiting for further developments.

U.S. Economy:  Last week’s friendly U.S. Non-Farm Payrolls report has some convinced that the economy has turned a corner so anticipation may be building that this news will in some way show up in the supply/demand reports.

Supply and Demand:  Demand remains sluggish. Traders will continue to watch events in the Middle East and the strength of the U.S. economy for clues. Uncertainty and possible disruptions in supply will drive up prices.

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