February Crude Oil confirmed its weekly closing price top at $103.28 with its sell-off through the last minor bottom at $95.16 and a key 50 percent level at $95.15.
In addition, the penetration and subsequent close under the uptrending Gann angle at $97.73 this week is also a sign of impending weakness. Finally, the market closed on the bearish side of a downtrending Gann angle at $98.07. All of these factors indicate the crude oil market is poised to move lower. The current chart pattern suggests a trade down to a combination uptrending Gann angle/50 percent level at $89.51 is likely over the near-term.
After holding steady over a four-week period, crude oil finally succumbed to selling pressure because of the rising U.S. Dollar. With uncertainty likely to continue in the Euro Zone, investors shifted assets into the U.S. Dollar.
The Euro fell all week under the weight of tremendous selling pressure as traders began another round of deleveraging after it became clear the Euro Zone finance ministers could not come up with a concrete plan to solve the sovereign debt crisis. This led to a sharp rise in the U.S. Dollar, pressuring all commodities priced in dollars including crude oil.
As crude oil was breaking a pair of support levels, traders were focusing on the prospect of a slowdown in demand because of the possibility of a recession in the Euro Zone. The threat of a recession has become increasingly real because of the European policymakers’ inability to stop the rise in short-term interest rates and to enforce financial austerity plans.
Last week I warned that a number of technical factors were holding crude oil prices up. Additionally, it was mentioned that traders were blaming high frequency traders and the possibility of a military conflict with Iran on this condition. I also warned that margin call pressure could also trigger a liquidation break. With investors aggressively slashing positions across the board in commodity and equity markets, this proved to be true as institutions and hedge funds liquidated crude oil positions in a flurry because of a drastic shift in investor sentiment. Last week’s actions by the large traders were an obvious sign that these investors were clearing the table for bearish economic conditions in 2012.
The only friendly news surfacing last week was OPEC’s decision to adopt a production ceiling of 30 million barrels a day. This is potentially bullish if demand can increase and that is not likely if Europe falls into a recession. At this time, OPEC is producing about 700,000 barrels a day above its ceiling. It looks as if OPEC is taking a pre-emptive strike against a drop in demand. This may be enough to hold prices steady, but prices could rise sharply if there is any disruption in supply.
Traders should look for lower prices this week as the liquidation of higher-risk assets is likely to continue. The cash from these transactions should continue to flow into the U.S. Dollar, pressuring all commodities priced in dollars including crude oil. Although Iran is still quietly rattling its sword, the market doesn’t seem to be anticipating any major disruptions in supply at this time. It looks as if investment liquidation has taken control of the market, shifting speculation to the back-burner. This should keep the downside pressure on crude oil.
Factors Affecting Crude Oil This Week:
Supply and Demand: The U.S. supply/demand situation has been holding steady, but traders will be watching to see if the economic slowdown in Europe is beginning to curtail demand in the U.S.
European Sovereign Debt Crisis: Without a concrete plan in place, investors have been preparing for a Euro Zone recession. The threat of mass downgrades of European nations as well as national banks has made traders uneasy. If France gets downgraded, then look for a sharp rise in the U.S. Dollar. This should drive crude oil sharply lower.
U.S. Economy: The U.S. economy has been holding steady, but it still isn’t strong enough to carry high-priced oil if Europe falls into a recession or if world-wide demand falls.
Middle East Conflicts: There is still the possibility that Iran may close the Strait of Hormuz, but traders seem to be discounting this event. It looks as if it is going to take aggressive military action to encourage long-traders to get back in the game.
By. FX Empire
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