February Crude Oil futures rallied for a second consecutive week, however, the weak follow-through to the upside indicates that the move was most likely triggered by short-covering rather than new buying. In addition, technical factors played a role in stopping the rally as well as skepticism over the latest supply and demand data.
Technically, the market did all that it was expected to do after reaching a major retracement zone on the weekly chart at $95.90 to $93.46 and reaching oversold levels on most oscillator and indicator charts. The subsequent reversal to the upside was triggered by short-covering after commodity funds had built up huge positions and the market ran out of sellers.
Based on the break from the late August top at $106.22 to the late November bottom at $92.10, technical analysts were expecting a retracement into $99.16 to $100.83. As of December 11, February crude had reached a high at $98.92, before profit-taking and fresh shorting killed the upside momentum. The market is now setting up for a possible retracement of the rally from $92.10 to $98.92, making $95.51 the next potential downside target.
Also stopping the market was an angle moving down .50 per week from the $106.22 top. This angle stopped the rally at $98.72 the week-ending December 13. It moves down to $98.22 the week-ending December 20.
The first possible support level is an angle at $96.10 the week-ending December 13 and $98.10 the following week. Breaking through this angle could trigger further downside action with another angle at $95.10 a potential downside target.
Fundamentally, two consecutive weekly draw downs in supply according to the Energy Information Administration helped boost crude oil prices these past two weeks. However, last week’s draw down of 10.6 million barrels is drawing the attention of traders. Since the market was looking for a drawdown of only 2.5 million barrels, traders are questioning the accuracy of the number.
Traders should be skeptical about the latest figures because they may lead one to believe that demand is picking up. This may be far from the truth because the draw down could be attributed to fewer crude imports, inclement weather and a tax assessment. Since traders are building a valid case for disputing the latest supply number, investors have to watch for a possible adjustment the other way this week. This may mean an adjustment of perhaps 8 million barrels the other way. If supply does adjust upward then look for this to pressure crude prices next week.
Barring any relevant supply draw down, crude oil may have topped at $98.92. This sets up the market for a potential pullback to $95.51 to $94.71 over the near-term.