October Crude Oil futures failed to follow-through to the upside after last week’s surge took out the recent top at $107.85. The subsequent sell-off suggests overbought conditions and a possible shift in the fundamentals.
Earlier in the month, a falling U.S. Dollar and escalating unrest in Egypt encouraged speculators to drive up crude oil. Since crude oil is dollar-denominated, a drop in the Greenback made crude oil less expensive for foreign investors. This was expected to drive up demand. As the situation in Egypt unfolded, speculators became concerned about the possibility of supply disruptions in the Middle East.
With both supply and demand potentially being affected simultaneously, crude oil speculators experienced the “perfect trading storm” and took advantage of the situation by driving prices from $101.82 to $107.93 in a short-period of time.
As conditions improved somewhat in Egypt, speculators began to pare their long positions, instead choosing to focus on the upcoming Fed minutes which were due to be reported on August 21. This report was expected to directly affect the direction of the U.S. Dollar since it would reveal how Federal Reserve members felt about the possibility of the central bank reducing its $85 billion in monthly stimulus.
Although the Fed minutes didn’t reveal any surprises, it didn’t dispel the thought that the Fed would begin tapering as early as September. This action by the central…