Crude oil futures surged this week as traders appeared to be unfazed by a few of the traditional fundamentals that should have curtailed the upside action.
This week, the Energy Information Administration (EIA) reported that U.S. crude oil stocks jumped 6.4 million barrels during the week-ended January 24. Analysts were looking for the data to show a 2.1 million barrel increase.
Prices rallied despite production increases after cold weather shut down many U.S. refiners in the Midwest and East Coast the previous week. A greater than expected increase in crude oil imports also contributed to the increase in supply.
The hard numbers show that supply stood at 357.6 million barrels the week-ended January 24. This represented a 4.17% surplus to the EIA five-year average of 343.34 million barrels. The EIA also reported that refinery utilization rates rose 1.7 percentage points to 88.2%. The break in the cold weather allowed the Midwest refiners to increase production by 6.6 percentage points to 94%.
The weekly price gain could have been greater if not for the break in the equity markets and the additional reduction of monthly monetary stimulus by the U.S. Federal Reserve that tends to drive up the U.S. Dollar. Since crude oil is dollar-denominated, a stronger Greenback usually means lower foreign demand.
Despite the rally in crude oil, traders still have to be concerned about the possible impact on demand if the emerging-market sell-off reaches the crisis mode. Crude oil prices held up fairly well this week, but questions have been raised over whether this trend can continue over the long-run if the weakness prevails in the emerging economies.
While some traders believe this week’s gains were limited by slowing growth in China, the market was certainly helped by the freezing temperatures across a major part of the U.S. The cold weather helped drive up demand for product. However, late in the week, the biggest influence on prices was the mostly positive U.S. economic news. On January 30, the market received a boost after the Commerce Department said the U.S. economy grew at a 3.2% annual pace in the fourth quarter.
As the market nears key resistance areas, traders are going to have to decide whether the increased demand is going to last or go away as temperatures begin to rise. In addition, investors should discover over the next couple of weeks if the emerging market issues are likely to continue. Finally, traders may also have to respond to the possibility of an economic slowdown in China.
At this time, it looks as if the weather and the improving U.S. economy are the main factors driving the market higher. The weather will eventually improve and the U.S. economy is likely to continue to grow. This means the Fed will continue to taper stimulus, making the dollar rise. Eventually, a higher priced dollar will curtail demand, leading to the start of another correction.
Technically, the main trend is down on the weekly chart. The strong recovery from $91.47 has put the market in a position to turn the trend to up on a trade through $100.79, but some traders believe this move will not be sustainable.
The main range is $104.37 to $91.47. This makes the retracement zone at $97.92 to $99.44 a possible resistance area. This area was tested this week. A downtrending angle at $98.62 also pierces the zone. If the market is going to reverse back to the downside, it should occur inside this zone. If the rally doesn’t stop then look for the move to extend into $100.79 to $101.81.
The first sign of weakness will be a break back under the 50% level at $97.92. Keep in mind that another lower top could lead to an eventual break back under the recent bottom at $91.47.
Although the market has reached a key retracement zone, the upside momentum hasn’t shown any sign of letting up. This could be because it is a weather driven market. The rally is likely to stop when the Midwest and East Coast begin warming. The break from the current highs should start if the emerging market situation worsens or if the dollar starts to breakout to the upside.