After several weeks of consolidation, December crude oil futures broke sharply, reflecting the perception that a slowing economy will lead to a drop in demand for oil.
The initial catalyst behind the break was the release of the weaker-than-expected September U.S. Non-Farm Payrolls report. This report was postponed earlier in the month because of the government shutdown which may explain the recent sideways price action. Traders were not willing to play either side of the market until they were sure about the state of the economy.
The jobs report showed that the economy added 148,000 jobs. This was below the estimate of 180,000 new jobs. The unemployment rate did fall, however, from 7.3% to 7.2%. Missing the estimate may have been bullish for Treasury markets and stocks because it likely means the Fed will refrain from tapering its monthly monetary stimulus before 2014, but it was not friendly to the U.S. Dollar. Typically, a weaker dollar triggers increased demand from foreign investors, but under current market conditions, their buying hasn’t been enough to stem the selling pressure from fund traders and speculators.
With the perception that the U.S. economy is sluggish at best and may have been temporarily derailed by the government shutdown and debt ceiling debate, the shorting pressure is likely to continue until the supply and demand situation flattens out.
This week, data from the U.S. Energy Information Administration showed a rise in crude supplies that was more than expected. The EIA reported that crude stockpiles rose 5.2 million barrels for the week ended October 18. Analysts had been looking for a 3 million barrel decline.
The weak fundamental news drew the attention of short-sellers who forced longs out of the market when a key 50% level at $100.38 was taken out with conviction. This set up another round of selling pressure when a long term support angle was taken out at $99.52.
A pair of retracement levels at $98.17 and $97.61 was expected to stop the slide or at least produce a technical bounce, but the shorting pressure was just too great for the weak buyers who attempted to establish a new lower support level.
The current downside momentum suggests December crude oil is well on its way to the Fibonacci target at $94.76. A sustained move through this level may even trigger further shorting pressure into $92.52. If the market does hold $94.76 then look for prices to stabilize and ping-pong between this support level and $97.61.
A consolidation inside the retracement zone bounded by $97.61 and $94.76 does not necessarily mean the market is bottoming, however. This is not likely to occur until demand picks up. Even if there is a technical bounce on the daily chart due to oversold conditions, these short-term moves are likely to be met with fresh shorting pressure until the supply/demand picture stabilizes.