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Crude Oil Analysis for the Week of February 13, 2012

By FX Empire | Mon, 13 February 2012 00:46 | 0

The lack of follow-through to the downside led to a fast turnaround in April Crude Oil last week. Although the market closed higher for the week, it remained inside of the previous week’s range and therefore posted an inside week. This pattern often indicates impending volatility with a slight bias to the upside.

Besides the limited range week, the market also ping-ponged inside of a retracement zone created by the main range of $114.87 to $75.92. These levels are $95.40 and $99.99.  The longer the market stays hemmed inside of the 50 percent and 61.8 percent zone, the stronger the breakout once the market decides to make its move.

The fact that crude oil is pinned inside of this tight range adds to the mystery behind its uncertainty. Although the main trend is up on the weekly chart, a pair of tops at $103.20 and $103.90 continues to weigh on any advances. This may appear to be a potentially bearish setup, but until the double-top is confirmed by a break through the recent swing bottom at $92.95, one cannot claim the trend is down.

Crude oil price chart

Besides the swing bottom, additional support is being provided by an uptrending support angle at $94.92. Although this line hasn’t been tested, traders should expect to see a technical bounce if it’s touched. On the other hand, a trade through this angle with clarity and conviction could lead to an acceleration to the downside.

April crude oil started the week firm after traders failed to take out the previous week’s low and expanded its gains last Tuesday when news leaked that Greece was close to agreeing to a solution to its debt woes. In an unusual move because of recent decoupling, crude oil actually followed the Euro higher as speculators demanded more risky assets. By the end of the week, the rally had stalled and profit-takers took the market lower on speculation that Greece had once again backed out of a deal to shore up its finances.

With crude oil clearly tied to the movement in Euro and the developments in the Euro Zone, it looks as if sovereign debt news is going to trump any supply and demand reports at least over the near-term. From a long-term point of view, if financial problems in Europe begin to escalate once again then talk of a recession in Europe will lead to fresh speculation of a drop in demand for crude oil.

While the dealings between Greece and the European Union may have dominated the news last week, a friendly U.S. crude oil inventory report on Wednesday suggested demand is improving. This news even pushed the market briefly above the psychological $100 price level on Thursday before the negative developments in Greece crushed the rally. Even though supply fell, analysts were mixed as to whether demand caused the drop or a slowdown in imports.

Although the charts indicate uncertainty and the change in sentiment due to the problems in Greece suggest impending weakness, Goldman Sachs remains a staunch bull, calling for demand to eventually outstrip supply this year. The company suggests it’s just a matter of time before the fundamentals shift in the favor of higher prices.

In addition to the fresh fundamental news last week, some crude oil traders remained focused on the rising tension between the U.S., Europe and Iran. Iranian lawmakers seem to be the aggressors at this time. Their plan calls for the halting of crude exports to Europe before the European Union begins an oil embargo this summer. With Europe suffering through a severe winter, the timing of an embargo couldn’t be worse. As tensions grow worse between the Western powers and Iran, a floor could begin to form that prevents the market from dropping drastically.

The overall outlook for crude oil this week remains sideways. This is unless the story out of Greece worsens. If this scenario develops and the Euro plunges, then look for crude oil and other risky assets to fall in sympathy. If April crude oil takes out the last swing bottom at $92.95, then shorts may pile on, driving the market sharply lower. 

A positive development out of Greece will reverse Friday’s negative trend and could drive the market back up above the $100.00 barrier. As you can see, uncertainty will be the theme until Greece and the European Union get on the same page.

Factors Affecting Crude Oil This Week:

European Sovereign Debt Crisis:  Based on Friday’s action, Greece and its deal with the European Union remain the key driving force in this market. Simply stated, if a deal is reached, then crude oil will trade firm. If a deal cannot be reached, then look for weakness to continue.

Supply and Demand:  The supply picture was friendly last week but that may have been because imports were down. The short-term outlook for supply inventories is positive because of the improving U.S. economy.  The long-term outlook is sketchy because of the possibility of a recession in Europe if the Greece deal is not approved.

Geopolitical Events:  A support base seems to be forming because of tensions between the Western World and Iran. Although not officially a “bullish” tone, there does seem to be support on the breaks and this may be related to concerns that problems between the Europe and Iran may escalate.

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