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Crude Oil Analysis for the Week of October 31, 2011

December Crude Oil futures posted a huge gain last week. The rare combination of technical factors and strong fundamentals helped to drive the market higher. Based on the strong close, the rally is expected to continue this week although oversold conditions on the daily chart could trigger a short-term correction.

Last week the main trend turned up on the weekly chart on a move through the swing top at $90.96. This triggered an acceleration to the upside because of stop losses and momentum buying. In addition, the market broke out above a downtrending Gann angle that had been holding down the market since the $115.45 top was formed in early May.

Since the bottom was created, the main objective of the forecasted rally has been the 50 percent to 61.8 percent retracement zone at $95.30 to $100.06. Current momentum suggests that this zone could be reached early this week. It’s a long shot, but a downtrending Gann angle at $102.45 is also a target, but this is highly unlikely to be reached.

oil price movements

If overbought conditions trigger a profit-taking sell-off then look for the start of a 2 to 3 day break. This move would be considered normal; however, if the uptrending Gann angle at $91.15 is violated then look for the possible start of a more serious correction of up to 50 percent of the short-term rally from $75.15 to $94.65. This downside target is $84.90.

After spiking down to $75.15 in early October, December Crude rebounded quite nicely the past three weeks. Speculation that Europe was going to release a plan to shore up the banks, increase the fund to contain contagion and settle the Greece debt matter helped boost prices throughout this time period, but it took the actual release of the plan last Thursday to finally send prices soaring.

Oil soared and the main trend changed to up late in the week when Euro Zone finance ministers finally released an agreement to fix the sovereign debt situation that had been lingering for over two-years. Now that the plan is out there, crude oil traders are wondering how much of a drag on the economy the funding of this plan will have on the European economy. There is no question that the plan is a positive step toward fixing the debt issues, but what will be the cost to the economy?

With Europe now seeking ways to fund their bailout plan, the rally in crude oil may actually stall if they have to turn to austerity measures that cause energy demand to fall. Despite the fear of lower demand in Europe and an economic slow down, U.S. economic news was a little more friendly as preliminary GDP showed some growth. This wiped out concerns that the U.S. was headed for a recession although it did indicate the economy still has plenty of room to grow.

Over the next several months oil traders are going to spend some time determining the best price for crude. In other words, they are going to have to strip out some of the excessive demand that is present and figure out its true value. Last week, for example, prices were driven higher by a weaker Dollar because of the euphoria out of Europe. What happens when this euphoria wears off? Will crude seek a level in the mid-80’s? It seems hard to justify crude oil in the mid-90’s with European demand expected to fall and the U.S. economy continuing to tread water.

Another factor which could drive down prices is Libya. Since the country is set to step up production, the global supply should increase, further depressing prices. Although Libya is not expected to be a short-term factor, traders should start watching its production numbers so that they are not surprised.

This week, traders should watch the EUR USD carefully. Overbought conditions may trigger a break, sending demand for Dollars higher. This may also trigger a shift in investor sentiment in the equity markets and for hard assets. A stronger Dollar and less demand for higher-yielding assets will put pressure on crude oil. Be careful buying strength if you missed the rally and watch for a potential reversal starting on the daily charts.

Factors Affecting Crude Oil This Week:

U.S. Dollar – Simply stated a weaker Dollar means commodities priced in dollars like crude oil will move higher. A stronger Dollar has the opposite effect. Last week’s shedding of Dollars helped to drive crude oil higher, but the Dollar Index is oversold, leading to the possibility of a reversal back up. This will have a negative affect on crude oil prices.

Supply and Demand – Huge draw downs in supply appear to have caught many traders by surprise, triggering massive short-covering rallies the past two weeks. Because traders were focusing on the economy, many thought the slow down would lead to a drop in demand and thus higher supply numbers. The oil inventory numbers have shown just the opposite. Overall it seems like the oil market is disjointed from the fundamentals. At some point the situation will correct itself. Either someone is hoarding supply or the economy is actually getting better.

U.S. Economic Reports – Early in the week, the focus will be on the ISM Index. Traders will be watching to see if the report can hold its ground and remain above the expansion/contraction threshold.

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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