February crude oil futures fluctuated between gains and losses this week as investors reacted to the latest economic reports and the U.S. Federal Reserve’s decision to begin reducing its monthly monetary stimulus.
Despite the Fed’s decision to taper and the stronger U.S. Dollar, crude oil prices continued to climb as investors expressed optimism about the U.S. economic recovery. The strengthening economy should lead to stronger demand which in turn would help take care of the high inventory figures.
Crude oil has risen 10 of the previous 14 trading sessions which puts it in the category of strong and decisive. The market even rallied after the Fed announced its decision to trim $10 billion of the $85 billion in monthly monetary stimulus. Many traders were hesitating about playing the long side of the market because an early tapering by the Fed was expected to trigger a surge in the U.S. Dollar which was expected to lead to a drop in foreign demand. Crude traders looked the other way, however, and bought the market as a sign that they believe the stronger economy will increase demand enough to offset the expected drop in foreign demand.
Also helping to underpin the market was the third consecutive weekly drop in supply according to the Energy Information Administration. The EIA reported a decline of 2.9 million barrels last week. Investors were pricing in a 4.0 million barrel increase. Crude oil stocks, however, remain at their highest level for this time of year which means demand is going to have to pick up or this will become an issue once again.
Technically, the main range is $106.22 to $92.10, making the retracement zone created by this range at $99.16 to $100.83, the next likely upside target and potential resistance zone. Last this week, the market was straddling the lower or 50% level at $99.16.
In another sign of strength, the market crossed over to the bullish side of an uptrending Gann angle at $98.10 this week and $100.10 next week. The market also crossed over to the strong side of a downtrending angle at $98.22 the week-ending December 20 and $97.72 the week-ending December 27. The chart pattern suggests that the market will continue to exhibit a bullish tone as long as the $98.22 to $98.10 zone holds as support.
The tone of the market will be determined next week by how the market reacts to the retracement zone at $99.16 to $100.83. Taking this zone out with conviction should trigger a move to $101.97. It will also mean that investors are ignoring the strengthening U.S. Dollar and focusing on the improving economy.