After the sell-off in crude oil the week-ending January 3, one would have thought that technically oversold trading conditions would have triggered the start of a short-covering rally. In addition, chart watchers would have been looking for some sort of technical bounce off the pair of Fibonacci price levels at $94.14 and $93.46. Finally, some would have even been looking for the selling pressure to subside near the recent bottom at $92.10.
This wasn’t the case, however, during the week-ending January 9 as short-sellers and weak longs continued to exit this market en masse, The inability to even mount enough counter-trend buying power or attract fresh bottom-picking typically means that the market hasn’t even reached a value zone yet.
Taking out the recent bottom at $92.10 with conviction should create enough downside pressure to challenge the June 2013 bottom at $90.05. If downside momentum continues then the April 2013 bottom at $85.57 will be the next target.
Because of oversold conditions on the daily chart, the market is ripe for periodic short-covering rallies. The main trend is clearly down on the weekly chart and this was reaffirmed when the swing bottom at $92.10 was taken out. The new main top is at $100.75.
The main trend will remain down until this top is violated. Until this occurs, traders are likely to sell rallies. Due to the size of the current break from $100.75, one would expect to see retracements of $4.00 or $5.00 so don’t be surprised by the size of the moves once the shorts give up on the downside.
Fundamentally, the main issue driving the market lower is the high supply. Even the extreme cold weather in the U.S. and expectations of greater use of heating oil could not trigger a short-covering rally since this was offset by a sharp rise in gasoline. According to the U.S. Energy Department, supplies of gasoline rose by 6.2 million barrels last week. The figure represented that demand for gasoline was the lowest in a year.
According to the U.S. Energy Information Administration, crude oil inventories fell by 2.68 million barrels in the week ended January 3. The figure beat expectations for a decline of 849,000 barrels, but failed to attract buyers since the total U.S. crude oil inventory figure stood at 357.9 million barrels.
The high inventory and the news that Libya is going to be supplying more oil next week should keep some pressure on the market. Bullish U.S. economic data may soften the price decline, but a surge in the U.S. Dollar may dampen foreign demand. At this time, it looks like short-covering due to oversold conditions in the futures market will be the only reason prices may rise. Bottom-picking and profit-taking as the market nears $90.00 may also help. A break under $90.00, however, could trigger an acceleration to the downside.