September crude oil futures continued to soar this week, proving that last week’s huge rally was no fluke. The market spiked up early in the week before running into fresh selling pressure slightly above the March 2012 top at $106.35. The actual high for the week was $106.53. The subsequent sell-off is not indicative of an impending change in trend, but could be signaling overbought conditions.
So far the initial reaction from the top should be judged as mild, however, a close for the week under $103.05 would be indicative of more serious selling pressure. If this occurs then look for selling pressure to trigger a minimum move to $99.57 over the near-term. Since the main trend is up on the weekly chart, a correction back into this price could draw the attention of buyers if the fundamentals remain the same.
Fundamentally, the initial thrust to the upside this week was fueled by political unrest in Egypt and signs of an improving economy. Speculation that the situation in Egypt will escalate and lead to disruptions in supply continued to underpin the market at the start of the week. Additionally, last week’s latest U.S. Non-Farm Payrolls data served as a sign of an improving economy, leading to thoughts of increased demand.
This week the U.S. Energy Information Administration (EIA) supply and demand report helped give prices a boost when it revealed a decline of more than 10 million barrels for the week ended June 28. This news combined with the American Petroleum Institute report signaling a 9-million barrel drop for last week helped trigger additional short-covering as well as attracting fresh momentum buying.
Like all rallies, however, the huge surge in prices over a short-term period quickly put the market into an overbought position. Buying began to dry up as the market approached the March 2012 top, encouraging long speculators to pare positions and play for a near-term break into more reasonable price levels. A sustained break into the 50% level at $99.57 should draw the attention of value-based buyers seeking more favorable entry prices.
Besides the situation in Egypt and the supply/demand outlook, investors should pay close attention to the movement of the U.S. Dollar. Since the problems in Egypt escalated last week, crude oil traders have been divorcing themselves from the movement in the U.S. Dollar. Theoretically, a rising dollar leads to a drop in demand for crude oil since it has an impact on oil exports. Last week’s surge in crude oil occurred when the dollar was hitting a three-year high. This is a strong sign investors are paying more attention to Egypt and its impact on supply rather than the dollar and its influence on demand.