March crude oil closed higher last week after the Fed announced it would keep interest rates at ultra-low levels until late-2014. The news helped trigger a short-covering rally which turned the market around after an earlier set-back.
From a long-term perspective the main trend is up, but the developing double-top at $103.20 to $103.90 indicates the presence of selling pressure. Conventional chart pattern analysis says, however, that the double-top will not be confirmed until the swing bottom at $92.95 is violated.
Short-term traders seem to be most concerned with the $92.95 to $103.90 range. The mid-point of this range is $98.43. This price appears to be acting like a pivot price. Regaining this price level after a failed breakdown last week suggests a slight upward bias. This puts crude oil in a position to open up firm this week, setting up the possibility of a test of the $103.20 to $103.90 tops.
Despite the stronger Euro and weaker U.S. Dollar last week, crude oil did not exhibit the strength one would have expected. This decoupling could be a sign that traders are focusing more closely on the supply/demand situation although a weak Dollar directly affects demand.
Additionally, late-breaking news that Iran may impose an embargo on crude oil to the European Union before the EU implements its own embargo in July also gave prices a lift. Finally, another bullish U.S. manufacturing report served as a sign that the economy was continuing its slow, but steady recovery. This also helped maintain a firm undertone in the market.
Last week’s EIA and API inventory reports were both bearish. This just added to the uncertainty. This uncertainty can lead to a drop in volatility which means tight trading ranges and limited price movement. This supports my assessment that prices are likely to remain rangebound until traders pick a direction.
Overall it was a slow week in the crude oil market, but bullish news appears to be piling up. The reason why it may not be taking off to the upside is likely tied to the risk premium that has been built in regarding Iran. In addition, $100 per barrel seems to be a comfort level for most traders.
Unless the news from Iran suddenly shifts in either direction, March crude oil is likely to remain between $103.90 and $92.95 over the near-term with $98.43 controlling its short-term direction.
Factors Affecting Crude Oil This Week:
Supply and Demand: Supply continues to build keeping downside pressure on prices. The weaker Dollar may eventually lead to new demand.
European Sovereign Debt Crisis: The rise in the Euro and the subsequent break in the Dollar have brought a little optimism to the market. Some traders feel that the crisis has turned a corner and that little-by-little the EU and the European Central Bank will take control of the situation. Others feel that if Greece cannot be reined in then Italy and Spain will soon fall.
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Geopolitical Events: Despite the diminished possibility of a military conflict between the U.S. and Iran, there is the possibility that the situation between Iran and the European Union will begin to escalate especially if Iran imposes an embargo on the EU.
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