Crude oil surged last week to its highest level since May 2011. The close at $109.77 represents a $13.96 gain since bottoming at $95.81 on February 2.
Not only did the market breakout over a downtrending Gann angle from the $114.09 top at $108.72, but it also closed on the bullish side of a steep uptrending Gann angle from the $95.81 bottom. This angle comes in at $111.81 this week which means crude oil has to rally at least $2.05 to maintain its torrid upward pace.
If April crude oil begins to flatten or if upside momentum begins to slow, then traders should watch for the start of a near-term setback. The first sign of weakness will be a failure to hold above $108.72. Even if it does sell-off, it is likely to find support at $103.81. If the market can continue to post strong gains then the charts indicate that the May top at $114.09 is likely to be tested by March 9.
Since the current market is moving vertically, speculators have to watch for daily or weekly closing price reversal tops. These types of tops are often volatile and often lead to wicked breaks of 50 percent or more of the last rally.
Fundamentally, demand continues to drop. This means that this entire rally is being driven by speculation. To be more specific, political posturing is to blame for higher crude oil prices and the jump in gasoline prices. Although there is only a threat of a military conflict in the Middle East, traders are acting as if there is a worldwide shortage of crude oil.
U.S. Treasury Secretary Timothy Geithner seems to believe that an improving economy and Iran’s “saber-rattling” were to blame for the surge in prices. He along with President Obama agreed that there was “no quick fix”. So it’s nice to know that the administration is on the same page. At the same time, U.S. consumers are suffering because of high gasoline prices. Taking money from consumers that would normally go toward food, shelter and clothing could disrupt the “so-called” recovery and create a slow down in the U.S. economy. And of course, the Fed will say there is no inflation. It looks as if the beat down of the American consumer is likely to continue.
High oil prices usually force the politicians to take action. In this case, it looks like Washington is preparing to pressure Saudi Arabia to increase production. At the same time it is also considering releasing oil from the U.S. strategic reserve.
Over the week-end, Saudi Arabia announced that it has increased its crude oil exports to cover any shortfall to the world supply from Iranian exports. This may be enough to clear up the uncertainty and to calm a few nerves. Ultimately, it all depends on how convinced speculators become that the supply-chain will not be interrupted.
With Saudi Arabia increasing output from 7.5 million barrels per day to just over 9 million barrels, bullish speculators may decide to pare positions. This could trigger a near-term correction, but not necessarily a change in trend. The key will be whether Saudi Arabia decides to make this a long-term move or keep it temporary.
Since this is an election year in the U.S., the President cannot afford any setbacks because of high gasoline prices. This is why traders should also watch for the U.S. to release oil from its strategic reserve. This is highly speculative, but with the White House at stake, the higher gasoline prices rise, the greater the chance of this occurring.
The weaker Dollar also played a role in last week’s rise in oil prices. Traders seeking more return bought higher risk assets while selling the Greenback. Since oil is priced in dollars, the cost per barrel became attractive to buyers. This increased demand but not as much as concerns over supply.
Increased production by Saudi Arabia and the release of oil from the strategic reserve are two potentially bearish factors that could drive prices lower this week. However, if Iran keeps up its tough stance or if it makes additional military threats then traders will not have to worry about the downside. The direction of the market this week will depend upon the strength of the speculative trading bloc.
Factors Affecting Crude Oil This Week:
Geopolitical Events: Actions by Iran are causing the West to be reactive. This includes requesting Saudi Arabia to increase production as well as threatening to release oil from the U.S. strategic reserve. Both seem to be short-term solutions at this time and may not even cause speculative traders to blink.
European Sovereign Debt Crisis: A relative calm is sweeping Europe at this time causing the Euro to rise and the Dollar to weaken. This may have helped increase demand for crude oil last week. Ultimately, high priced oil will hurt Europe so all the euphoria caused by Greece’s bailout is likely to be overshadowed by a slow-down in economic growth.
Supply and Demand: Despite talk of a U.S. recovery, demand seems to be relatively low. Supply hasn’t been hurt by Iran’s actions, but the U.S. is threatening to release oil from its strategic reserve anyway. This should be enough to pressure prices over the short-run.
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