Like many of the higher-risk assets, energy-related markets posted a top at the end of April and started a decline the first few days in May. Without any major events last week, the markets were largely influenced by the strength and direction of the U.S. Dollar.
Commodities such as crude oil react to the movement of the U.S. Dollar because they are dollar-denominated. So when the dollar strengthens, the commodity becomes more expensive to foreign investors. Because of this, a rising dollar often leads to lower demand, which puts downside pressure on the commodity.
On May 3, the U.S. Dollar Index, which measures the U.S. Dollar's value versus six currencies, fell to its lowest in over 15 months, led by the Japanese Yen's surge, partly on skepticism about whether Japan policy-makers would intervene to slow its rise.
Thin trading conditions due to a Japanese holiday and position-squaring ahead of Friday's U.S. Non-Farm Payrolls report helped trigger a short-covering rally by the dollar, helping to put pressure on crude oil prices.
The selling in the crude oil market could've been worse if not for speculative buyers taking advantage of wildfires in Canada that have forced several operations in the region to close and escalating Libyan violence that raised worries about immediate oil supplies.
The short-covering was so fierce that Brent oil's premium over West Texas Intermediate briefly disappeared when the U.S. market traded before returning to its…
Like many of the higher-risk assets, energy-related markets posted a top at the end of April and started a decline the first few days in May. Without any major events last week, the markets were largely influenced by the strength and direction of the U.S. Dollar.
Commodities such as crude oil react to the movement of the U.S. Dollar because they are dollar-denominated. So when the dollar strengthens, the commodity becomes more expensive to foreign investors. Because of this, a rising dollar often leads to lower demand, which puts downside pressure on the commodity.
On May 3, the U.S. Dollar Index, which measures the U.S. Dollar's value versus six currencies, fell to its lowest in over 15 months, led by the Japanese Yen's surge, partly on skepticism about whether Japan policy-makers would intervene to slow its rise.
Thin trading conditions due to a Japanese holiday and position-squaring ahead of Friday's U.S. Non-Farm Payrolls report helped trigger a short-covering rally by the dollar, helping to put pressure on crude oil prices.
The selling in the crude oil market could've been worse if not for speculative buyers taking advantage of wildfires in Canada that have forced several operations in the region to close and escalating Libyan violence that raised worries about immediate oil supplies.
The short-covering was so fierce that Brent oil's premium over West Texas Intermediate briefly disappeared when the U.S. market traded before returning to its narrowest discount, or "contango," in six weeks against the international benchmark.
In the U.S. markets, the discount for front-month June over second month July fell to its smallest in seven months, driven by the potential for reduced shipments of Canadian crude to U.S. refiners.
Once the situations in Canada and Libya are settled, investors are going to have to face the reality of the global supply/demand situation again. Investors are once again raising questions over production. Recent data shows OPEC's crude production climbed in April to 32.64 million barrels per day, close to the highest in recent history.
Iran's April exports from southern fields increased, as did seaborne exports from Russia, the biggest exporter outside OPEC.
Speculator bets on higher Brent prices reached record highs last week. Bets on WTI futures and options also rose, to 10-month highs. Both serve as signs that the crude oil market may have reached overbought territory.
Warnings are also being issued that suggest the expected drop in the U.S. rig count that helped crude prices recover to end soon as shale oil producers increase drilling. According to Morgan Stanley, "History suggests a rig count bottom is imminent and increases are coming."
Finally, with crude oil stockpiles hitting record highs above 543 million barrels last week, the current rally may be unsustainable at current price levels.
At the start of next week, we'll know more about the direction of the U.S. Dollar because of its reaction to the U.S. Non-Farm Payrolls report on May 6, the fire in Canada may be under control and the situation in Libya may have come to an amicable conclusion. This will force investors to turn their focus toward the huge supply and could give them the incentive to begin locking in profits at current price levels.
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If you're a trend trader then you have to stay long until the trend changes which means a trade through $36.57 on the weekly June crude oil chart. A trade through $46.78 will signal a resumption of the uptrend.
A break though the short-term retracement zone at $41.68 to $40.47 and the intermediate term retracement zone at $38.79 and $36.90 will be early signs of weakness.
If you're a support and resistance trader then it is suggested you start planning an exit strategy. This should include considering booking profits as the market approaches the main 50% level at $48.36.
The best upside target remains $48.95 the week-ending June 3. However, we don't know at this time if the market will be trading up into it, or down from a test of the Fibonacci level at $52.51.
In conclusion, the biggest factor steering prices at this time remains the perception that the crude oil market is going through the balancing process. However, given the huge supply, prices may be too far ahead in the balancing process to maintain the rally. This is one reason why we are looking for a near-term top. All you can do as a trader is to set an upside target and live with it, or move up stops to protect open profits.
The price action this week's suggests the market is being driven by nervous traders. This is based on their reaction to outside events such as the rising U.S. Dollar, the fire in Canada and the unrest in Libya. Any event that creates uncertainty will weigh on the minds of traders and that's how tops form.
The best trading suggests at this time are: stop buying at current price levels, the risk/reward isn't favorable at this time, set profit objectives based on the chart pattern. The best targets are last week's high at $46.78, the main 50% level at $48.36 and the price and time target at $48.95. Finally, move your stops up to project what you have.
