July Crude Oil futures finished the week lower in lackluster fashion. Despite closing on its high the previous week which should have been a lay-up for a higher opening and follow-through rally, speculative traders failed to bite on the set-up, giving long investors an early excuse to take profits and pare positions.
The framework for last week's weakness was actually laid out the previous week when short-covering drove the market to $104.50 on the heels of a surprise decline in imports according the U.S. Energy Information Agency inventory report for the week-ended May 16. Although on paper this served as a sign that increased domestic production was reducing our dependence on foreign oil, savvy traders knew that one week did not make a trend.
The short-term price action may have suggested higher prices to follow, but veteran traders failed to chase the market higher. Instead solid bids were placed in the market, spooking weaker shorts out of their positions and giving the professional trader a better price to initiate fresh short positions. The price action suggests the market merely reflected a "buy the rumor, sell the news event".
The ability to sift through the EIA data paid off this week for the professional because the same government agency that reported the decline in imports the week-ended May 16 showed that U.S crude oil imports averaged 7.8 million barrels per day the week-ended May 23, up by over 1.3 million barrels per day from the previous week.…
July Crude Oil futures finished the week lower in lackluster fashion. Despite closing on its high the previous week which should have been a lay-up for a higher opening and follow-through rally, speculative traders failed to bite on the set-up, giving long investors an early excuse to take profits and pare positions.
The framework for last week's weakness was actually laid out the previous week when short-covering drove the market to $104.50 on the heels of a surprise decline in imports according the U.S. Energy Information Agency inventory report for the week-ended May 16. Although on paper this served as a sign that increased domestic production was reducing our dependence on foreign oil, savvy traders knew that one week did not make a trend.
The short-term price action may have suggested higher prices to follow, but veteran traders failed to chase the market higher. Instead solid bids were placed in the market, spooking weaker shorts out of their positions and giving the professional trader a better price to initiate fresh short positions. The price action suggests the market merely reflected a "buy the rumor, sell the news event".
The ability to sift through the EIA data paid off this week for the professional because the same government agency that reported the decline in imports the week-ended May 16 showed that U.S crude oil imports averaged 7.8 million barrels per day the week-ended May 23, up by over 1.3 million barrels per day from the previous week. In addition, the EIA reported that over the last four weeks, crude oil imports averaged 7.1 million barrels per day, 9.3% below the same four-week period last year.
This last bit of information should prove to be more beneficial than simply watching the week-to-week change in imports. If you do that then you are likely to talk yourself in and out of positions. Last week's revelation that imports were actually declining steadily when compared to last year's levels shows that there may actually be a trend, but that it may have a more subtle impact on the price action than the week-to-week supply and demand figures.
If you chose to make imports your new indicator for trend direction then you should start with the weekly average for guidance. This may eliminate some of the noise created by the week-to-week movement in imports. Once this trend is assessed then value should be addressed and this comes from reading the charts. So while the raw import number the week-ended May 16 may have been bullish, the news was released after the market had already risen nearly 2% from a recent bottom.
Since the change in imports is likely to be a slow-moving fundamental event and not subject to the same volatility of the weekly supply/demand data, traders should take their time to use this information in conjunction with the support and resistance areas on the charts. In other words, look for buying opportunities on support as long as the import data continues to trend lower and fade the news if prices are too high. This seems to be the way the professional is looking at the data.
In assessing the value areas this week, one sees that the first potential support is a trend line moving up $1.00 per week from the $98.10 bottom. This potential support is at $103.10. Since this price level stands alone, it does not meet the requirements of a "value zone".
The short-term range is $98.10 to $104.50. A 50% to 62% retracement of this range makes $101.30 to $100.54 the next potential value zone. A pair of trend lines comes in at $100.90 and $100.60. These lines form the best support and potential "value area" with the 62% level at $100.54.
Should crude oil correct into this value area and the import data continue its bullish trend then a test of the $101.30 to $100.54 area should offer the best value for the buyer looking to refresh his long position.
We'll continue to watch the import data and the price action on a week-to-week basis to see if we are on the same side of the professional trader.
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