Despite crossing to the strong side of a long-term 50% level earlier in the week to extend the rally, the price action late in the week strongly suggests that March West Texas Intermediate crude oil may have finally found enough resistance and selling pressure to form a top and fuel the start of a short-term correction.
Since early December, crude oil has been on a tear as investors began to buy into the idea that the OPEC-led production cuts could tighten supply over the long-run. If you look at the timing of the price surge, however, you’ll notice that the breakout to the upside was largely fueled by a steep drop in the U.S. Dollar, which helped boost all dollar-denominated commodities like crude oil and gold.
Furthermore, exchange statistics show that hedge funds and other large speculators had been taking on huge long positions, providing the upside momentum the market needed to sustain the rally.
Along the way, the rally was further underpinned by a pipeline shutdown in the North Sea and a pipeline explosion in Libya.
Seven consecutive weeks of drawdowns in U.S. crude oil supply have also had a positive influence on prices.
The plethora of bullish news gave the hedge funds the confidence to continue to build on their long positions week after week despite lingering worries over increasing U.S. production. Hedge fund willingness to buy strength drove the upside momentum into multi-year highs. Traders weren’t playing for dips in…