After the U.S. government shutdown and threat of a Treasury default held crude oil market participants hostage for half of October, oil speculators finally felt confident enough to test the downside of the short-term range after lawmakers reached an agreement to temporarily end the crisis.
Although interest rates plunged on the news, encouraging foreign investor to shed the U.S. Dollar, the dollar-denominated December crude oil market fell to a ten week low.
Speculators hit the market hard on the notion that the government shutdown weakened the already fragile economy, leading to a possible drop in demand for crude oil. In addition, talk is circulating that because of the possibility of another jolt to the economy, the Fed may refrain from tapering its monetary stimulus until mid-2014.
The technical picture suggests the market may be poised for further downside action. After a seven week decline from the $109.70 top, the market is now threatening to take out a minor 50% level at $100.38.
The weekly chart indicates there is plenty of room to the downside with an uptrending angle at $99.02 the first likely target. This is followed by a Fibonacci level at $98.17 and another major 50% level at $97.61. All of these price levels are capable of generating technical bounces on the daily chart so conditions could get choppy as the market tests these levels.
If there is going to be an acceleration to the downside, it is likely to occur on a sustained move through $97.61. Under this price, the distance between support levels widens. Fresh shorting pressure along with the triggering of sell stops is likely to contribute heavily to the anticipated move.
After breaking through $100.38 with conviction, this angle is likely to become new resistance. The major resistance is a downtrending angle at $101.70. A breakout over this angle will put crude oil in a position of strength.
While the technical picture may be revealing a clearly defined downtrend, the fundamentals remain a mess. The government shutdown forced the EIA to close so no one is sure of the latest supply and demand situation. In addition, investors are still trying to determine the impact of the government shutdown on the economy. This likely means crude oil traders will not only be reacting to supply and demand figures, but also to the major economic reports. This could only add to the volatility.
This week, investors are likely to go with the weakness from the start, therefore, the surprise will be to the upside if reports start to show the shutdown had no effect on the economy, or if supply happens to fall more than expected in the next EIA report. If the reports confirm a weakening economy and a drop in demand then the downtrend should continue.
Another variable that could impact the price of crude is the U.S. Dollar. Although crude oil is falling along with the dollar, at some point, investors will take advantage of the weaker Greenback and buy crude oil. So while the trend may be down at this time, short-sellers still have to take precautions against sudden changes in direction.