Speculative buyers drove October Crude Oil futures higher this week following reports of an imminent attack on Syria by the United States. On August 27, headline news across the world drove investors out of higher-risk assets and into lower-yielding investments.
Additionally, in almost blueprint-like fashion, speculators bought crude oil on concerns the military action against Syria would lead to disruptions in the supply of oil coming out of the Middle East.
The oil market surged to a two year high on August 28, but the rally came to a screeching halt when investors began to question the length and scope of the possible attack.
Comments from U.S. President Barack Obama apparently put some doubt into the minds of speculators when he said that a “tailored, limited” military style strike could be enough to deter any future use of chemical weapons. This comment dampened rumors of Russia, China and other Syrian allies getting involved after the initial attack. Essentially, speculators who bought oil in anticipation of a long-term conflict pared positions due to the uncertainty around the length of the potential attack.
At the same time President Obama was helping to put in a top, the U.S. Energy Information Administration (EIA) released its weekly petroleum inventory report. The report showed that crude inventories increased by 3 million barrels last week. In addition, crude oil inventory reached 362 million barrels, keeping it near the upper limit of the five-year range for this time of the year. The timing of the report helped crude oil give back more than half of its gains on August 28, setting it up for lower prices the next trading session.
Technically, the sell-off was impressive, but it failed to signal anything except the start of a near-term correction. Based on the short-term range of $103.60 to $112.34, the next downside target is the retracement zone at $107.87 to $106.84. Since the main trend is up, buyers are likely to defend the trend on a pullback into the retracement zone.
The main trend on the daily chart is not likely to be threatened and will not change to down unless the swing bottom at $103.50 is taken out with conviction. If the market does reach the retracement zone then look for sideways action as traders are likely to wait in this area for more information regarding the expected military action.
The October Crude Oil main trend is also up on the weekly chart. This trend will turn down when the swing bottom at $101.82 is taken out. This gives weekly trend traders a little more room to the downside than the daily trend traders. Bullish traders really have nothing to worry about as long as the market stops inside the retracement zone at $107.87 to $106.84.
However, a close under $106.42 on August 29 will change the bullish picture and could indicate the start of a 2 to 3 day break.
Now that the market has established resistance, it will try to build a support base as speculators wait out the start of the threatened military action against Syria. Buyers are likely to return when the planned attack becomes imminent. Until then, the market could drift sideways. Of course, if diplomatic efforts succeed and the attack plan is scraped then look for prices to weaken substantially because of the high supply.