March crude oil futures rose to even for the year, erasing all of the loss from the December 31, 2013 close at $98.55. Positive U.S. economic data, stabilizing equity markets and supportive data from government reports showing increased demand for petroleum products underpinned the futures market most of the week.
A greater-than-expected drop in jobless claims helped drive up crude oil on Thursday, setting the tone for a strong close going into next week. The major determinant of next week’s action should be Friday’s U.S. Non-Farm Payrolls report. In January, it was reported the economy added only 74,000 new jobs in December. This was well below expectations, triggering the initial break in crude oil from its $100.79 top. The market is currently approaching the $100 barrier, creating the possibility of for a similar move in February. A weak report is likely to start another break. A much stronger jobs report should trigger a breakout over $100.79.
Besides the outlook for a positive jobs report and an improving economy, the U.S. Energy Information Administration report also helped underpin oil prices. Although U.S. crude oil supplies rose by 400,000 barrels in the week-ended January 31, the market continued to receive support from a smaller than expected rise in gasoline and a big drop in heating oil and diesel fuel. Moving forward, crude oil prices should continue to be supported by the distillate drawdowns and the slight builds in gasoline supplies.
Technically, March crude oil has reached a critical point on the chart. Based on the main range of $104.37 to $91.47, the retracement zone created by this range could become important resistance. This range is $97.92 to $99.44.
Major downtrending resistance from the $104.37 top is at $98.37 this week. This angle forms a possible resistance cluster at $97.92 to $98.37 and $98.37 to $99.44. These areas have the potential to stop any rallies. Traders should watch for signs of selling pressure following tests of these clusters. These would include closing price reversal tops on either the intraday or daily charts.
A close over $99.44 will be a sign of strength. This could fuel a drive through the main top at $100.79. If upside momentum is strong next week then look for an eventual rally into $101.37 to $101.47.
Since crude oil has reached a major retracement zone, there is the strong possibility of a top. Fundamentally, the U.S. Non-Farm Payroll report on February 7 could help put the top in if it shows that the number of jobs added in January were substantially below the estimate of 191K. A better than expected report could trigger a spike to the upside. Gains will be limited because the dollar is expected to rally also on a bullish report. This would lead to a gradual slowdown in demand for foreign buyers.