Although U.S. crude oil supplies fell 300,000 barrels for the week-ending May 17, according to an Energy Information Administration (EIA) report, traders seemed to be more focused on outside markets and economic data for information this week.
This week’s drop of 300,000 barrels followed last week’s slide of 600,000 barrels, but supplies remained 1.1% above last year’s levels. According to the EIA, inventories are “well above the upper limit of the average range for this time last year.” This is the best explanation as to why the market, despite seemingly friendly fundamentals, is having trouble breaking out over the top of 2013 range.
The weekly chart has clearly defined tops at $97.38, $98.22 and $99.77. These levels are providing solid resistance. This week, traders challenged the first level, but sellers stopped the rally at $97.35, triggering the start of a weekly decline. Based on the last rally from $86.16 to $$97.38, the current break has put the market in a position to test the retracement zone of this range at $91.77 to $90.45.
Besides the swing tops and bottoms, a huge triangle chart pattern on the weekly chart is holding the market in check. Next week, the resistance line in this triangle drops in at $97.38. On the downside, the support angle moves up to $86.67. A long-term view of this chart pattern suggests that the market could remain range bound for several months albeit in a pretty wide range.
With traders apparently shrugging off the traditional supply and demand fundamentals this week, investors relied on outside markets and economic data for direction. The outside markets that exerted the most influence on crude oil prices were the U.S. Dollar and U.S. equities. Weaker-than-expected manufacturing data from China was the economic news that influenced crude oil prices the most later in the week.
The U.S. Dollar rallied sharply higher and U.S. equity markets broke hard on May 22 after Federal Reserve Chairman Ben Bernanke told Congress that the central bank could begin to taper its aggressive bond-buying program as early as the next few monetary policy meetings. His statement spooked investors and gave them an excuse to take profits after a more than month long rise in the equity markets. Crude oil prices fell in sympathy with stocks as investors shed equities and commodities across the board.
His comments also drove up the U.S. Dollar, making commodities priced in dollars more expensive to foreign traders. This led to speculation that demand would drop and inventories would rise further. The stronger dollar fueled the aggressive selling of crude oil. This selling pressure is likely to continue next week as long as the U.S. Dollar continues to strengthen and investors continue to shed risky assets.
The break is likely to stop inside the retracement zone at $91.77 to $90.45, as investors will see this as a move to value and likely begin to buy in this zone. Keep in mind that the Fed will begin to curtail its aggressive bond-buying program because of a strengthening economy, and this should be supportive for crude oil. This is just another reason to believe that July crude oil is likely to remain range bound over the near-term.