August crude oil futures regained the long-term resistance line of a triangle chart pattern on July 3, putting it in a position to close higher for the week. Shortly after the breakout, speculators went after the last swing top at $99.21, putting the market in a position to challenge a top from May 2012 at $104.50.
The market is being guided higher by an uptrending Gann angle from the April 2013 bottom at $86.29. This angle is moving up at a rate of $1.00 per week.
The market is being driven higher for two main reasons. Firstly, the American Petroleum Institute reported a drop in supply by 9.4 million barrels last week. The decline of nearly 10.0 million barrels was the biggest reduction in more than 10 years. The drawdown took traders by surprise, triggering the sharp upside breakout. The rapidly tightening supplies could mean the start of long uptrend.
The unrest in Egypt is the second key reason why crude oil prices are rising. Bullish speculators fear a disruption in supply because of the lack of stability in the region. These speculators are betting the political turmoil will lead to a disruption in the transportation of nearly 2.4 million barrels per day of oil.
During the past week, Egyptian President Mohamed Mursi rejected an army ultimatum to leave office. Other than the street violence, traders haven’t seen any military action yet, but based on the size of the move this week, speculators are anticipating some activity soon.
The current fear in the area is that the unrest will spread to other countries. Rumors are already circulating that Algeria is a powder keg ready to blow. The emergence of problems in this country could mean supply is at risk.
Technically, price levels are not that important at this time. Traders should put more emphasis on upside momentum. As long as volatility continues to increase, there should be a bid in the market, helping to provide the support.
The first sign of weakness will be a downward shift in momentum. This action will not necessarily mean the main trend is getting ready to turn down, but it could indicate the start of a short-term correction.
This rally is different than previous rallies in that it is being driven by technical factors such as momentum, fundamental factors such as the drawdown in inventory and finally, a major news event. The combination of these three factors could set a bullish tone in the market for several weeks.
Friday’s U.S. Non-Farm Payrolls report should not have too much of an effect on crude oil prices since speculators are putting more weight on the unrest in Egypt at this time.