August Crude Oil futures finished lower last week for a number of reasons. The market started the week under pressure and never looked back. The catalyst at the start of the week was the uncertainty about the financial crisis in Greece. The initial reaction by investors was not caused by the usual supply and demand factors per se, but by investors moving money out of risky assets.
On Monday, the Greek government confirmed it wouldn't be able to make its monthly loan repayment to the International Monetary Fund by the deadline on Tuesday, June 30. This action moved Greece closer to an exit from the Euro Zone.
Greek leaving the Euro Zone would cast a pall over the oil markets. The move would strengthen the U.S. dollar, making the dollar-denominated commodity more expensive for foreign buyers. This would hurt demand while driving down imports and fueling a rise in inventories.
There is also speculation that the Greek crisis could trigger an economic slowdown in Europe. This would also reduce demand from an economy that is struggling to gain some traction just four months after the European Central Bank started its stimulus program.
Also helping to drive the market lower were concerns about the Iran nuclear deal. A deal between Iran and the major western nations would put an end to the sanctions against the country. This would open the door to badly needed foreign investment. An influx of funds would likely be used by Iran to buy oil equipment to shore up…
August Crude Oil futures finished lower last week for a number of reasons. The market started the week under pressure and never looked back. The catalyst at the start of the week was the uncertainty about the financial crisis in Greece. The initial reaction by investors was not caused by the usual supply and demand factors per se, but by investors moving money out of risky assets.
On Monday, the Greek government confirmed it wouldn't be able to make its monthly loan repayment to the International Monetary Fund by the deadline on Tuesday, June 30. This action moved Greece closer to an exit from the Euro Zone.
Greek leaving the Euro Zone would cast a pall over the oil markets. The move would strengthen the U.S. dollar, making the dollar-denominated commodity more expensive for foreign buyers. This would hurt demand while driving down imports and fueling a rise in inventories.
There is also speculation that the Greek crisis could trigger an economic slowdown in Europe. This would also reduce demand from an economy that is struggling to gain some traction just four months after the European Central Bank started its stimulus program.
Also helping to drive the market lower were concerns about the Iran nuclear deal. A deal between Iran and the major western nations would put an end to the sanctions against the country. This would open the door to badly needed foreign investment. An influx of funds would likely be used by Iran to buy oil equipment to shore up its antiquated oil industry.
Iran would be able to begin exporting crude oil to global markets immediately, however, with the improvements it could probably double its output in six months. This would add to the global oil glut, putting further pressure on oil prices.
The over-supplied market is already a huge concern. At this time, global oil production is exceeding consumption. If there are problems with demand in Europe because of Greece then coupled with Iran's production, supply will grow at an even faster pace.
Although U.S. oil stockpiles had drawn down for eight straight weeks, European supply is still growing. According to Genscape Inc., crude supplies reached 60.6 million barrels in June in the key European oil hub of Amsterdam, Rotterdam and Antwerp.
Last week, the U.S. streak of eight consecutive inventory drawdowns came to a halt after the U.S. Energy Information Administration reported that supply increased by 2.4 million barrels per day. Traders were looking for a drawdown of 1.9 million barrels. The EIA also said that U.S. crude oil production output rose to 9.7 million barrels per day, the highest level since 1971. On top of this bearish news, the American Petroleum Institute said earlier in the week that stockpiles increased 1.9 million barrels.
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Technically, after several weeks of consolidation across a retracement zone at $60.50 to $61.35, crude oil prices finally collapsed. The subsequent selling pressure drove the market below the last swing bottom at $56.88. This turned the main trend to down on the weekly chart for the first time since the week-ending April 17.
The main range is $48.71 to $64.12. Its retracement zone is $56.42 to $54.60. Even though the trend is now down, there could be a technical bounce to the upside if buyers resurface on a test of the retracement zone. This is what short-sellers have to be aware of next week. The catalyst behind the short-covering move could be a relief rally caused by a new deal between Greek and its creditors.
In summary, the perfect storm of fundamental factors helped drive crude oil prices lower this week, however, the move put the market in a position to test a value zone at $56.42 to $54.60. Short-sellers should be on alert for a technical bounce caused by value-seekers and fueled by the easing of tensions over Greece.
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