This week’s price action in the crude oil market suggests that last week’s huge sell-off may have been a liquidation break or the break designed to drive out the weakest longs. If you recall, prior to the sell-off, hedge fund and money managers were sitting in record long positions in crude oil.
After trading lower earlier in the week, crude oil started to make a comeback and is now in a position to post a major reversal to the weekly chart. This price action suggests impending volatility and investor indecision. Despite last week’s steep sell-off, this week’s response by investors suggests the market may be going through a transition period as the bearish investors battle it out with the bullish speculators.
On one hand, the bullish speculators are placing high hopes on a weaker dollar and OPEC-lead output cuts to underpin prices. Bearish investors are saying that rallies will continue to be capped as long as U.S. crude remains near record levels.
Prices are being supported this week by the U.S. Energy Information Administration’s weekly inventories data which showed supply decrease for the first time in nine weeks, dropping 237,000 barrels from a record high.
The Fed’s less-hawkish monetary policy statement has been pressuring the U.S. Dollar since Wednesday. This seems to be having a positive influence on the dollar-denominated crude oil market because it may be helping to increase foreign demand.