August crude oil futures bucked the trend in many commodities to post a strong close for the week. The market was buoyed by signs of an improving economy and comments from a Fed official.
The week started with the market under pressure because of comments last week from Federal Reserve Chairman Ben Bernanke. In his post-Fed policy statement news conference, the Chairman basically said that the Fed would begin tapering its aggressive $85 billion monthly stimulus program when the evidence shows an improving economy. The market read his statement as the Fed will begin winding down the stimulus by the end of the year, but maybe as early as September.
His statement sent interest rates higher. Consequently, Treasury instruments fell along with stocks and commodities. August crude oil futures dropped from $99.21 on June 19 to $92.67 by June 24. At this point, crude oil investors thought the market had dropped enough and mounted a strong rebound, taking the market back to $97.41 by Thursday, June 27.
Also pressuring crude oil early in the week were concerns about the Chinese credit markets. At the start of the week, the market was reacting as if the Chinese markets were moving toward a full-blown credit crisis. About mid-week, however, crude oil began to stabilize after a People’s Bank of China official reassured traders by stating that the central bank was moving toward establishing more “reasonable rates”.
Stronger than expected U.S. economic reports also helped bolster crude oil markets. Particularly strong were the U.S. housing markets. Although the initial reaction was down, the market recovered after the U.S. reported lower GDP. The fact that the market rallied later in the session most likely means that speculators were looking ahead rather that at the stale GDP data.
While the sell-off was attributed to Bernanke’s comments about tapering the stimulus program, the rally on Thursday, June 27 was brought about by a few friendly words from New York Fed President William Dudley. The Fed official said that the market reaction by investors was “out of sync” with Fed thinking. In addition, he added that economic conditions rather than a calendar will determine when the Fed decides to unwind the program. Finally, he added that if labor conditions and economic growth were not what the Fed expected, stimulus could actually increase.
All in all, his statements put a bullish spin on the crude oil market. Traders reacted as if they expected the Fed to standby its latest assessment of the economy and to wait for improved growth before ending the stimulus. It looks as if traders are going to take a September change in Fed stimulus buying off the table. This could pressure interest rates while driving down the U.S. Dollar. Demand for crude oil could increase if the dollar weakens.
Technically, August Crude Oil rebounded after making a successful test of a pair of 50% levels at $94.32 and $93.13. The actual low at $92.67 was higher than the previous bottom at $91.50. This is a sign of strength. Finishing the week near the high could trigger further upside action next week with $99.21 the next potential upside target.
While the current action in the market is not necessarily indicative of the start of a bull market, it may be sending signals to traders that the Fed is still not close to ending its stimulus program. This would be good for interest rates and equities.