Although the chart pattern suggested October Crude Oil was set up for the start of a substantial correction, the futures contract rebounded quickly after a two-week setback and is now in a position to breakout to the upside on both the weekly and monthly charts.
The weekly chart indicates a breakout over the last top at $107.85 could trigger a fast rally into the April 29, 2011 contract high at $108.63. A trade through the top at $107.85 will also make $101.82 a new main bottom. The market would have to take out this price to turn the main trend down. Otherwise, it looks like upside momentum is going to take this market higher.
The monthly chart also indicates a serious up move is in the making. Last month, a long-term trend line stopped the rally at $108.53. This month, the trend line moves down to $108.03. A sustained move through this angle will be a sign of strength and could fuel an acceleration into another downtrending line at $112.28.
Fundamentally, after weakness earlier in the week, crude oil reversed sharply to the upside. Speculator liquidation caused the early decline. These traders were anticipating a rise in the U.S. Dollar on speculation the Fed would announce the date and the amount of its tapering of monetary stimulus. This action would’ve increased U.S. interest rates, making the U.S. Dollar a more attractive investment. Since crude oil is dollar-denominated, crude oil prices were expected to collapse from lower demand.
Instead, crude oil prices surged as escalating violence in Egypt brought uncertainty to the market as well as disruptions in the region. Although most analysts believe the violence in the country will not shut down key supply regions, speculators apparently are not taking any chances. They are pricing in the possibility the unrest will spread to a few major oil producing regions. Since there doesn’t appear to be an end to the situation, look for the speculative buying to continue into next week.
Although the problems in Egypt is the lead story, also underpinning the market is the worsening conflict in Syria and growing unrest in Libya. A surprise drop in U.S. supply also helped give prices a boost this week. A recent report from the EIA said oil inventories dropped by a bigger-than-expected 2.8 million barrels last week.
Next week, investors will still be watching the Fed for any hint it will begin tapering monetary stimulus. Economists are pricing in a possible September start, but price activity suggests otherwise. On August 15, U.S. interest rates surged, however, the dollar plunged. Although crude oil investors will be watching for action by the Fed and a bottom in the U.S. Dollar, the main driver of price action will be the escalating unrest in Egypt. Since this situation is unpredictable, volatility is expected to remain high and speculators are likely to continue to chase the market higher.