After falling from $97.38 on May 6 to $92.40 on May 15, July crude oil rebounded on May 16 to regain almost 50% of its recent break. This turnaround was expected, but most traders were looking for a test of the retracement zone at $91.77 to $90.45 before the rebound began.
Despite showing strength on the daily chart, the market is still having trouble with a pair of main tops at $98.22 and $99.77 as well as a downtrending resistance line at $97.71. Until these resistance areas are penetrated with conviction, expectations are for the market to remain in a sideways-to-lower trade.
Based on the short-term range of $86.16 to $97.38, the main downside target is a retracement zone at $91.77 to $90.45.
Fundamentally, the price of crude oil fell this week after disappointing economic growth figures in the Euro Zone. This weakness led to speculator selling of the Euro in anticipation of further stimulus action by the European Central Bank. The weakness in the Euro triggered a surge in the U.S. Dollar. Because crude oil is priced in dollars, speculators sold crude oil in anticipation of weaker demand.
On May 16, the U.S. Dollar weakened after reports showed a drop in housing starts and a weaker-than-expected weekly jobless claims report. The drop in the Greenback helped trigger a surge in crude oil prices. Traders approached the long side with caution, however, since they weren’t sure that this sluggish economic news represented a trend in the economy or one-time weakness.
Continuing to put uncertainty into the equation is likely to mean that July crude oil will remain range bound over the near-term with periodic spikes in either direction to reflect trader overreaction to economic reports.
The new figures showing a contraction in France and weaker-than-expected growth in German likely means global demand will continue to drop. This week, an Energy Department report showed that oil supplies declined unexpectedly last week. This news however was overshadowed by the weak economic data out of Europe.
Adding further to the weakness was a report from the International Energy Agency stating that U.S. oil production is expected to rise while global crude oil demand is likely to fall. If this forecast holds true then continue to look for more downside pressure.
Technically, the movement of the U.S. Dollar is controlling the direction of the crude oil market. If economic data continues to support a strong dollar then look for crude oil to have a bias to the downside. Weaker U.S. data could underpin the Greenback, leading to an upside breakout in crude oil. Based on these two uncertainties, continue to watch for a sideways trade this week.