September Crude Oil futures reached a new high for the year this week, but there was very little follow-through. This is a good sign that conditions are overbought and that some well-established longs may have been paring their positions at current price levels.
The recent vertical move is a strong sign that speculators have been driving the market higher. These speculators have been event driven and could begin to pullout of their long spots when the news changes. Recently, fortunate speculators caught a strong rally that was fueled by political uncertainty in Egypt, falling supply and a weaker dollar. All of these factors contributed in some way to the recent surge in oil prices.
Now that the unrest has subsided in Egypt, some investors may begin to book profits after a wild run to the upside. This has probably been happening since it looks like upside momentum has slowed. The U.S. Dollar has survived a successful retracement and could be ready for a near-term rally. This too may have a negative effect on oil prices. Finally, supply continues to fall according to the latest government reports. This should continue to underpin the market, but is probably not enough to trigger a move to new highs.
With the market trading at such lofty price levels, investors should watch for a closing price reversal top on either the weekly or the daily chart to signal the start of the next retracement. Since the dollar reacts almost every day to news, this market should be watched carefully since it is likely to influence the next major move in crude oil. A stronger dollar will put downside pressure on crude oil because it makes oil more expensive for foreign investors. This should lead to a drop in demand.
Technically, the market is ripe for the start of a near-term correction. The weekly chart indicates there is plenty of room to the downside with $99.33 a potential downside target.