After reaching a top at $98.24 on January 30, nearby crude oil futures weakened in what appeared to chart-watchers as the start of a short-term correction into a 50% retracement level at $91.82. Although the move would have been substantial, it wasn’t expected to be a trend-changing event. Instead, it was expected to be a buying opportunity for those who considered prices to be a bit too lofty at current levels.
Outside factors were contributing to the weakness. For one, the EUR/USD had topped at 1.3711 on February 1 and many thought that this was a sign that demand for higher-yielding assets was a little too strong for current economic conditions. The sell-off in the Euro gave some long crude oil traders a reason to pare their positions; however, the strength in the equity markets most likely prevented an even harder decline.
The Commitment of Traders report which shows the current open futures positions also showed a shift. According to the latest report on February 5, short commercial positions increased. This was a sign that prices had reached a level that was attractive to hedgers.
The combination of a weaker Euro and a growing short commercial position most likely triggered the start of the eight-day break from $98.24 to $94.97.
On February 11, short-traders were caught by surprise when OPEC raised forecasts for the amount of crude oil it will need to supply this year because of stronger fuel demand in emerging economies. This news helped form a new higher bottom at $94.97 while putting the nearby futures contract in a position to take out the recent top at $98.24.
Although it has yet to be confirmed, it will be interesting to see if the latest Commitment of Traders report shows an increase in speculative positions and/or a decrease in commercial short positions. This activity would be a strong sign that prices are headed higher.
The latest bearish news out of Europe highlighted the fact that the Euro Zone economy shrank more than expected. This news, which was expected to pressure crude oil because it strengthened the U.S. Dollar, failed to draw the attention of short-sellers on February 14. The subsequent rally reflected the strong confidence crude oil investors have in a U.S. economic recovery.
Technically, a breakout over $98.24 is likely to trigger a move to $99.66 next week. A move through $94.97 will resume the sell-off, leading to a possible correction to $92.90 over the near-term.