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Crude Oil Analysis for the Week of August 22, 2011

October Crude Oil futures fell last week on perceptions that the economic recovery in the U.S. remains sluggish. As the week wore on, disappointing U.S. economic reports continued to reveal a gloomy picture of the economy.

From weaker than expected existing home sales to bigger than expected weekly jobless claims, negative news weighed heavily on the confidence in the strength of the economic recovery. Bad economic news out of Europe also contributed to crude oil’s weakness as investors expressed worries about a possible double-dip recession.

Of chief concern at this time is the demand picture. Issues were raised about whether demand would drop off given the news that the Philadelphia Fed business activity index fell from 3.2 in July to minus 30.7 in August. This steep drop is being interpreted as a strong sign that the U.S. economy came to a screeching halt this summer.

While some traders were placing the blame for crude oil’s decline on demand, supply also played a major role in the market’s weakness. Last Wednesday the U.S. Department of Energy reported that crude oil stockpiles rose a massive 4.2 million barrels. Careful analysis revealed that increased production wasn’t the cause of the increase, but a drop in demand. This was further evidence that the supply/demand picture is shifting to the bearish side of the equation despite last week’s major energy reports citing increased global demand.

Technically October Crude Oil is in a downtrend. Based on the current chart pattern, the trend will not turn up until $101.00 is violated. Until then the market is likely to continue to flirt with the $80.00 per barrel level. Even if a solid short-covering rally were to develop, a retracement zone at $88.58 to $91.51 is likely to thwart any rally.

Factors Affecting Crude Oil This Week:

• Economic Reports. Traders will continue to monitor economic reports in both the Euro Zone and the U.S., looking for more signs of a slowing economy. A double-dip recession is the main concern at this time. Even with unrest in the Middle East and Libya, traders are keeping their eyes glued to economic news.

• Inventory Reports. Because of last week’s surprise gain in crude oil stockpiles, the weekly U.S. oil inventory report is back in the spotlight. Traders haven’t been paying too much attention to this report because the debt rating cut in the U.S. and the sovereign debt issues in the Euro Zone have been dominating the headlines. Last Wednesday’s surprise increase in supply is likely to mean this report is back on the radar.

• U.S. Dollar. Even if there is pressure on crude oil this week, a weaker U.S. Dollar is likely to limit the downside break. On the other hand, a major sell-off in the equities could trigger a flight to safety, boosting the Dollar and crushing crude oil

• Bernanke and Jackson Hole. On Friday, U.S. Fed Chairman Bernanke is going to give a major speech at a central banker’s summit in Jackson Hole, Wyoming. Last year he hinted at QE2 and the market’s moved in a big way. This year he is going to have to wow the audience once again because of the threat of recession. The markets are likely to react to everything he says, but traders will be particularly interested in whether he hints at another round of financial aid.

By. FX Empire

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EXXON Mobil -0.35
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