A slew of weak economic data last week and a stronger U.S. Dollar helped pressure December crude oil futures the week-ending November 1. Traders read the economic data as a sign that the recovery was sluggish, leading to expectations of lower demand. This was confirmed by the latest government report that showed U.S. oil supplies rose more-than-expected last week.
The latest Federal Reserve monetary policy statement also hurt crude oil prices last week because its ambiguity drove up the U.S. Dollar, making dollar-denominated crude oil more expensive to foreign investors, furthering weakening demand.
Traders were caught off guard by the Fed’s assessment of the economy. Many had priced in the possibility the economy had weakened enough to push the start of tapering its monetary stimulus into March 2014. Instead, the Fed’s statement seemed to imply that the recovery was on track, leaving open the possibility of a December taper.
This created the uncertainty that drove up the U.S. Dollar because tapering, or the reduction of stimulus, tends to drive up interest rates and thus demand for the underlying currency. Until traders can eliminate the fear of an early tapering, the dollar may continue to rally, essentially keeping downside pressure on the crude oil market.
The outside market influence appears to have put crude oil in a no-win situation. On one hand, an improving economy will bring the Fed closer to tapering, driving the dollar higher and perhaps having a negative influence on crude oil prices. On the other hand, a weakening economy will likely mean lower demand. Because of the unpredictable influence of outside markets, traders are more likely to shift their focus on value. This means that prices are likely to fall until speculators and investors feel they are getting bang for their buck.
This assessment could turn traditional fundamental traders into chart watchers because the charts may identify value before the supply/demand picture confirms it. The main range we are dealing with at this time is defined by the April bottom at $85.52 and the August top at $109.70. This price range has formed a retracement zone at $97.01 to $94.76. Two weeks ago December crude oil entered the retracement zone, putting the market in a position to form a support base. While the prices may look good, last week’s price action suggests there is still some downside momentum left.
If the downside momentum continues then crude may break as far as $92.77. This is slightly above a pair of bottoms at $91.05 and $90.69. Stabilizing inside the retracement zone, however, will be a strong sign that short-sellers are starting to lighten up. This could stop the slide and help form a support base. While bottom-picking is not suggested, investors should watch the price action inside the zone to determine if the downside momentum is slowing.
Testing and holding $94.76 could produce a potentially bullish reversal on the daily chart this week. Taking out $97.01, however, should trigger the start of a meaningful short-covering rally. According to the weekly chart, $99.70 is a possible upside target once the selling pressure subsides.
This week some traders are going to continue to ride the downtrend, however, this trend may come to end if value traders decide to stop the slide. The battle between the two trading styles is likely to take place inside the $97.01 to $94.76 zone.