December Crude Oil futures closed higher for the third consecutive week. This statement is a little deceiving since this market was down three out five days. Thursday's close put the market in an extremely weak position, however, a change in investor sentiment on Friday fueled a sharp recovery, leading to the slightly better weekly close.
Technically the main trend is still down on the weekly chart. A breakout above the swing top at $90.96 will turn the main trend to up. Before this occurs, crude oil has to clear the downtrending Gann angle from the $115.45 top at $90.45. The market has traded below this angle for 24 weeks so taking it out will be a sign of a shift in sentiment to the upside.
Although there may be some resistance on the first test of $90.45 to $90.60, upside momentum is expected to overcome this resistance. Should there be selling pressure; traders can expect the uptrending Gann angle at $87.15 to provide solid support.
Based on the main range of $115.45 to $75.15, a change in trend to up is likely to trigger an acceleration to the upside which could mean a test of the 50% to 61.8% retracement zone at $95.30 to $100.06 over the near-term.
The strong surge in December Crude oil on Friday was triggered by increased demand for risky assets as a result of the weaker U.S. Dollar. The cause of the Greenback's weakness was the perception that Euro Zone officials were close to completing a formal agreement to recapitalize European banks and restructure Greek debt. Although France and Germany continue to be at odds over the financing of the plan, the rally in the equity and commodity markets is a sign of optimism.
Although the main focus for crude oil traders was the news out of the Euro Zone, the death of Libyan dictator Moammar Gadhafi has traders wondering what affect it will have on oil's supply and demand situation. The high grade crude oil produced by Libya is better than that produced by Saudi Arabia. There is great demand for this oil, but it only accounts for about 2% of the world's oil supply with most of it going to Europe.
If conditions improve in Libya then expectations are for production to increase. After production was cut in half from February to August, moves have been made to shore up Libya's oil infrastructure. Although traders are optimistic that eventually it will be producing at 100% capacity, no one is certain how long this recovery will take. Basically, Libya is an unknown factor at this time.
The overall U.S. supply and demand picture is also a key factor to watch next week. During the week ended October 14 crude oil inventories declined by 4.70 million barrels to 332.90 million barrels. Inventories will be directly affected by changes in the U.S. economy. All signs seem to be pointing toward a renewed recovery in the economy, meaning that it not likely to go through another recession. On paper this is potentially bullish for crude oil.
• European Bank Reconstruction Agreement: Simply stated this agreement is expected to be bullish for crude oil. Shoring up the banks in Europe will bring back investor confidence to the financial markets. This should lead to an increase in demand for equities and commodities because of a weaker Dollar.
• U.S. Economy: An improving U.S. economy will also be bullish for crude oil. This week's key reports are related to housing, consumer confidence and durable goods. Housing is the backbone of the economy so if it can get back on track, employment is likely to follow. Improvements in housing and employment should lead to an increase in consumer confidence. This typically translates into more consumer spending. Last month's better than expected retail sales report triggered a strong rally in crude oil in early October. A friendly consumer confidence report is likely to fuel the same reaction.
• Supply and Demand: Traders shouldn't expect improved production in Libya to be factor yet. This is going to take time to develop. Improvements in the U.S. economy should lead to greater demand, however. It may be gradual, but traders should watch for a trend to begin to develop if U.S. economic conditions continue to get better.
By. FX Empire
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