Speculators continued to dump crude oil last week. The last of the longs finally realized that an attack on Syria by the U.S. was not going to happen. This shifted the focus on the U.S. economy which by all accounts is sputtering at best according to the Fed.
On September 18, the U.S. Federal Reserve announced it was not going to begin tapering its monthly $85 billion monetary stimulus. The event triggered a drop in interest rates and a subsequent decline in the U.S. Dollar. Since crude oil is dollar-denominated, theoretically, crude oil should have rallied because of an expected jump in foreign demand. Although the initial reaction by traders was to the upside, the market quickly ran out of buyers, leading to last week’s sell-off.
Besides being overpriced because of excessive speculative buying, investors may be realizing that the anemic pace of the U.S. economic recovery, despite the billions of dollars being supplied by the Fed, is likely to continue over the near-term. This may actually lead to a drop in domestic demand which should keep inventory at historically high levels. Rising supply should keep the downside pressure on the market which means prices are likely to drop below the psychological $100.00 level over the near-term.
The technical picture on the weekly chart actually supports this notion. Based on the June 3 bottom at $91.22 to the August 28 top at $111.34, the market seems poised for a test of the retracement zone at $101.28 to…