Crude Oil futures fell on Friday after the U.S. released a dismal jobs report, but still managed to close slightly better for the week. The reaction by traders strongly suggests that a weakening economy will diminish demand, leading to lower energy prices over the near-term.
The recent three-week rally appears to have come to an end after the market completed a 50% retracement of the break from 101.00 to 76.15 at 89.90. Technical expectations were for a rally into 88.58 to 91.51, and the market accommodated with very precise rally into this zone. Additional resistance comes in at a downtrending Gann angle from the 101.00 top at 89.00 this week.
Although a lower close on the weekly chart would have been a stronger sign of weakness, the close near the weekly low suggests a follow-through break may occur this week. Based on the short-term range of 76.15 to 89.90, Traders should watch for a minimum break into a retracement zone at 83.03 to 81.40. An additional downside target is an uptrending Gann angle at 84.15.
Bullish traders will be hoping the market forms support inside the retracement zone; however bearish traders are likely to treat it as a pivot, meaning a break through it will signal a weakening market and likely set up a break below 80.00.
Factors Affecting Crude Oil This Week:
• Economic Reports. Last Friday’s bleak U.S. Non-Farm Payrolls report is another sign that the economy may be slipping into a recession. This will be bad for demand. The ISM Services report will be released on Sept. 6. Traders are looking for a decline from 52.7 to 51.00. Even though a decline will indicate a weakening economy, traders will react more to how close it comes to the estimate. Overall, however, a reading below 50 will be extremely bearish for crude oil. On September 7, the Fed will release the Beige Book. This report will give traders a region-by-region outlook for the economy. Once again, traders will be looking for a ray of light in the economy.
• Weather. Next week the U.S. will be reaching the peak of hurricane season. Last week, a hurricane in the Gulf shut down production operations. This helped underpin the market, but by Friday, the break showed clearly that the market was more focused on the economy rather than the weather.
• Supply and Demand. Last week a huge drawdown in gasoline inventories drove up crude oil prices. This was the result of consumers topping their tanks ahead of Hurricane Irene. This week’s report is likely to show a drawdown in crude oil as refineries step up production to make up for the short-fall. Although this is potentially bullish, it is a short-lived condition so traders aren’t likely to commit to the long-side in a big way.
• U.S. Dollar. A weaker Dollar may also underpin crude oil, but because the economy continues to weaken, it is likely to only slow down the rate of decline.
• Federal Reserve. This is a little early since the Fed doesn’t meet until September 20 to 21, but now that the economy is clearly on a decline, look for the Fed to propose additional stimulus. Speculation that this would occur drove up demand for risky assets last week, helping to boost crude oil prices.
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By. FX Empire
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