After a two-day consolidation, August crude oil surged to the upside. The rally was set up by last week’s closing price reversal bottom at 89.61 and penetration of several technical points on the daily chart.
The key area which was successfully tested on the weekly chart was the retracement zone at 94.98 to 90.13. This area represented 50% to 61.8% of the range from the May 2010 bottom at 74.43 and the May 2011 top at 115.52.
The first upside resistance on the weekly chart was reached on Tuesday at a steep Gann angle down from the 115.52 main top at 97.52. A penetration of this level will indicate strength and the potential for a 50% test of the last break from 115.52 to 89.61. This target is 102.57.
Investor sentiment rose on Tuesday following the U.S. holiday. Two events triggered renewed optimism by investors for higher prices. Firstly, Barclay’s raised its 2012 forecast for Brent and U.S. crude oil, and secondly, Saudi Arabia slightly reduced the price of oil it charges to its Asian customers.
A rise in U.S. factory orders in May also triggered renewed demand as investors increased bets the U.S. economy would strengthen during the second half of the year.
Despite the outlook for improving fundamentals on the demand side of the equation, news that Portugal’s debt rating was sliced may renew fears of contagion in the Euro Zone. This could increase demand for the U.S. Dollar as a safe haven investment, thereby putting pressure on commodities like crude oil.
The technicals and fundamentals both support continued strength in crude oil the rest of the week, however, the up move may be muted if the debt situation in Portugal causes the Euro to tumble and safe haven currencies to rise.
Factors Affecting Crude Oil This Week:
• Less than a week since Greece approved its austerity measures, in a move that underpinned crude oil prices, renewed interest in Portugal’s debt issues may dampen gain in the crude oil market. Oil traders will have to watch this event unfold on a day-to-day basis. This uncertainty may not be enough to derail the rally in crude oil, but it may be enough to slow down the current upside momentum.
• Wednesday’s normal U.S. Energy Dept. oil inventory report has been delayed until Thursday due to the U.S. holiday. Domestic crude oil stocks are expected to show a decline of 2.3 million barrels.
• On Thursday, the European Central Bank meets to discuss monetary policy. Expectations are for a 25 basis point hike, however, a recent slow down in the Euro Zone economy may prompt the ECB to refrain from further hikes for several months. A weak outlook for the Euro Zone economy by the ECB may hurt demand for crude oil.
• Traders should watch for potential volatility because of conflicting analyst oil reports. Earlier this week, Barclays raised its 2012 forecast, however it left its 2011 forecast unchanged for Brent, but cut it for U.S. crude. Citigroup is predicting Brent may fall to $90 by September, but rise longer-term if Saudi Arabia cuts production and increased supply from the recently released strategic petroleum reserve oil.
• The U.S. Non-Farm Payrolls report on Friday is expected to show an increase of 87,000 jobs. A bearish number will indicate the economy is slowing. This could mean less demand for crude oil.
By. Commodities Mansion
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