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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Speculators May Rally to Crude After Nigeria and Libya Problems

November Crude Oil futures are in a position to close the week higher. This possible reversal on the weekly chart coupled with the strong upside price action earlier in the week, suggests the market may be in a position to change the trend to up on the daily chart.

The current upside price action suggests investors may be starting to turn their backs on the bearish fundamentals. Early Wednesday, the U.S. Energy Information Administration reported that U.S. crude inventories rose 3.67 million barrels to 362.3 million the previous week. This represented the biggest increase in five months.

Furthermore, traders had priced in a drawdown of 1.0 million barrels. The news encouraged some selling pressure, but failed to challenge last week’s low at $89.56. Following the biggest jump in supply in five months, one would’ve expected much greater selling pressure. The muted reaction suggests buyers may have come in to defend against a sell-off. This may be a sign that the trend is getting ready to turn higher.

On Wednesday, September 19, the U.S. Federal Reserve issued a hawkish monetary policy statement. It was interpreted to mean the central bank is moving closer to hiking interest rates. Rising interest rates make the U.S. Dollar a more attractive investment. Since crude oil is dollar-denominated, a stronger dollar tends to hurt demand for crude oil because it makes it more expensive to foreign traders, thus curtailing demand.

Inside Markets Chart 1 Dollar/Oil

The recent rapid rise by the U.S. Dollar has definitely helped put pressure on crude oil prices. But now that it looks like dollar investors received from the Fed what they wanted to hear, profit-takers may start to drive the dollar lower. This would be bullish for crude oil.

The relationship between interest rates, the dollar and crude oil may be a little difficult to see, but one fundamental event that speculators tend to react strongly to is the geopolitical event. This week’s oil worker’s strike in Nigeria appears to be gaining traction as well as the attention of crude oil traders. In addition, a rocket attack in Libya shut down a refinery.

These are important develops because they have a direct effect on supply. Unlike the events in Iraq, Syria and Ukraine, a geopolitical event that leads to a supply disruption tends to attract the attention of speculators. If you look at the recent Commitment of Traders report, you will see that all of the selling pressure has been coming from aggressive commodity and hedge fund selling. Since no one has been in the way to stop the selling, prices have fallen substantially. If bullish speculators return to crude oil because of the events in Libya and Nigeria, then this fresh buying may be enough to trigger a strong short-covering rally in crude oil.

The fundamental events this week have been supportive for crude oil. The price action on the daily chart is also indicating that traders may be ignoring the bearish supply news. If speculators return to support crude oil because of the geopolitical events in Libya and Nigeria then watch for a breakout over $95.07 next week. This could trigger a rally into $97.00 to $98.76 over the near-term.

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