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Crude Oil Analysis for the Week of October 10, 2011

December Crude Oil closed higher for the week after reversing earlier weakness. The market stopped breaking at 75.15, slightly above the May 2010 bottom at 75.01. Although the price was relatively low at that level, traders didn’t seem too interested in the market at this price until a bullish supply and demand report surprised traders.

The ensuing rally following the bottom reached a downtrending Gann angle that had provided resistance for the past four weeks. This week the angle drops down to 80.96. Since the market closed at 83.04, December Crude Oil is effectively on the bullish side of this angle. This represents a strong position and could lead to a test of the next downtrending Gann angle at 85.96.

Although the rally was impressive, the main trend is still down on the weekly chart and will remain down until the swing top at 90.96 is violated. Until then, the market is still susceptible to selling pressure and a volatile supply and demand situation.

Crude oil price movements

Weakness in the Euro on the thought that the European debt crisis would lead to a global recession helped drive crude oil prices lower early in the week. The weaker Euro meant a stronger U.S. Dollar, leading to higher prices for commodities priced in dollars. A weak economy is expected to weigh on demand. All of these factors kept buyers on the sidelines although the market was rapidly approaching major support under oversold conditions.

Last week’s EIA crude oil inventory report proved to be the catalyst this market needed to bottom and turn higher. Crude oil rose significantly after the government reporting agency reported an unexpected drop in U.S. inventories. The news surprised traders and trapped short-traders who had to scramble to liquidate sizeable positions. The weekly report from the EIA trumped the pessimistic tone that had been building in the market because of the situation in Europe. Pre-report estimates were predicting a rise in inventories of 1.5 million barrels. The actual number was reported as a 4.7 million barrel decrease.

Although short-covering triggered the initial rally, an optimistic tone from Europe regarding recapitalization of ailing banks and hints from Federal Reserve Chairman Bernanke that the Fed would announce stimulus if the economy needed it, fueled a recovery in the Euro and commodities respectively, setting the tone for a rise in crude oil on Thursday.

The news that the European Central Bank and the Bank of England were also going to provide liquidity to their economies also helped drive down the dollar while triggering additional short-covering and some fresh buying in the December contract. Finally on Friday, the U.S. reported a better-than-expected jobs increase in its monthly Non-Farm Payrolls report. Optimism returned to the risky asset markets because of this report helping crude oil to close near its high for the week.

Looking back at the week, clearly the surprise decrease in oil stockpiles was the main driver of trader activity. Although speculation is still high that the U.S. economy may stall, traders are becoming increasingly optimistic that the economy is being dragged down by the problems in Europe. Now that it appears that European finance officials seem to have a grasp on the situation and are turning their focus toward providing liquidity, crude oil may begin a sizeable recovery rally. At this time much of the rally is still short-covering, but conditions could change quickly if inventory reports continue to show draw downs and the trend changes to up on the charts.

Factors Affecting Crude Oil This Week:

• European Sovereign Debt Crisis – The moves last week by the Euro Zone finance ministers and the European Central Bank are signs that these officials are finally acknowledging that liquidity and not a Greece default is the main issue triggering the loss of investor confidence. Traders showed their support of such actions by covering commodity and equity short positions. However, within a few days these traders may be asking the officials to show more proof that they are willing to provide enough liquidity now as needed. If the E.U. finance ministers decide to drag their feet or pledge too little financial support then crude oil could once again weaken.

• Supply and Demand - Some veteran traders are saying that last week’s surprise drop in supply makes this week’s report a crap shoot as it clearly demonstrated that experts and analysts may not have a strong grasp on the current supply/demand situation. The problem lies with whether inventories are expected to drop because of speculation that an economic slowdown will lead to a decline in demand or that an actual slowdown is controlling the inventory picture. If demand falls because of an expected slowdown then traders are likely to continue to be surprised if U.S. economic reports continue to show even a glimmer of growth. It looks as if bearish traders may have been caught in a “sell the rumor, buy the fact” situation.

By. FX Empire

FXEmpire.com is the Forex flagship site of the FX Empire Network. The FX Empire Network provides readers with the most expert and most timely technical analyses, fundamental analyses and news-pieces; this in order to empower them to make for themselves the best possible financial decisions. The FX Empire Network’s other flagship sites include: StocksEmpire.com and CommoditiesEmpire.com.

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