Late breaking news on Thursday may have signaled the top in July crude oil as traders reacted with aggressive selling pressure. The move was triggered by comments from Fed Bank of Philadelphia President Charles Prosser. Speaking in New York on May 9, Process said he wants the central bank to start reducing the rate at which it buys bonds as soon as the next Federal Open Market Committee meeting in June.
He also added that the central bank would be “limited” in capability for more stimulus and the unwinding of the current measures would be harder than expected. This comment created uncertainty for investors, encouraging them to pare positions in risky assets and into the safety of the U.S. Dollar.
July crude oil reacted on the daily chart by selling off into the close. This completed three consecutive days of consolidation. On Friday and Monday, crude oil surged on the heels of last week’s friendly U.S. jobs report. Speculators took the news as a sign that an improving economy would lead to increased demand for crude oil.
Prosser’s comments imply that the economy has reached a positive turning point and that the Fed should consider curtailing its stimulus program effectively lifting the training wheels off the economy. If he is right in his assessment of the economy then eventually demand should pick up for crude oil as the economy improves. The sell-off today suggests that speculators may not believe that the economy is ready to take off.
Furthermore, the stronger dollar may also pressure crude prices since a higher Greenback means that crude oil will become more expensive for foreigners. This may also curtail demand for crude oil. The U.S. Dollar surged on Prosser’s statement on the thought that the easing of the Fed’s aggressive bond-purchasing program would drive up interest rates, making the dollar a more attractive investment.
Technically, the main trend is down on the weekly chart despite the strong rally from $86.16 to $97.38. A breakout above the down trend line at $97.71 would be a sign of strength, but July crude oil would have to cross the swing top at $98.22 in order to turn the main trend to up.
If Prosser’s comments have brought uncertainty to the crude oil market then look for long speculators to begin to pare positions. The stronger U.S. Dollar could also curtail demand for higher risk assets such as crude. Based on the short-term range of $86.16 to $97.38, investors should watch this week for a near-term pullback into a retracement zone at $91.77.