September crude oil futures traded sharply lower last week as long liquidation continued following the previous week’s closing price reversal top on the daily chart. The August 8 break took out the recent bottom at $102.67, changing the main trend to down and setting up the market for an eventual break into a retracement zone at $100.77 to $98.84.
The daily chart pattern suggests investors and speculators are aggressively leaving crude oil after a tremendous rally from $92.60 to $108.93, and seeking to move their capital into other markets and asset classes.
While the daily chart may be changing trend to down, the weekly chart indicates the market is merely going through a normal correction in a strong market. After breaking uptrending Gann angle support at $104.60, the market accelerated to the downside. The nearest target zone is the 50% level at $100.77 and the Fibonacci level at $98.84. Since the main trend is up on the weekly chart, longer-term traders may decide to show up in this zone to support prices.
The catalyst behind last week’s break appears to have been concerns about the Fed possibly scaling back its aggressive government bond buying by as early as September. For the most part, investors are ignoring the latest friendly trade balance news from China and shifting their focus to the U.S. economy.
The main concern for investors is the curtailing of monetary stimulus by the central bank. Many investors feel this move will hurt demand for crude oil because it will lead to higher interest rates and eventually, stronger demand for the U.S. Dollar. A stronger Greenback will make crude oil more expensive for foreign traders, thus leading to lower demand.
On Wednesday August 7, the U.S. Energy Information Administration announced crude-oil stockpiles fell by about 19 million barrels in July. However, for the week-ending August 2, gasoline inventories rose to their highest level for this time of the year in 24 years. Traders were caught by surprise by this report since they had priced in a 400,000 barrel decline.
With gasoline inventories rising, the assumption is that sometime in the future, demand for crude oil from refineries will also fall, leading to another potentially bearish increase in supply. Finally, overbought conditions as measured by the government’s Commitment of Trader’s report also signaled the market may have run out of buyers and was due for a strong technical correction.
Traders have to approach the short-side with caution this week. While it is likely the dollar will rally because of Fed tapering. Crude oil has been operating on its own fundamentals for a few weeks and investors may choose to ignore the stronger dollar and instead focus on the improving economy as the main catalyst behind the next rise in demand. A successful test of $100.77 to $98.84 will mean investors are still supporting the long side, and this could mean another test of the highs near $109.00.