Crude Oil Analysis
Crude Oil Analysis for the Week of November 21, 2011
January Crude Oil futures succumbed to selling pressure last week, reaching a high at $103.37 and forming a closing price reversal top. Once confirmed, this pattern often leads to a minimum 50% correction of the most recent rally. Although a sell-off is likely, it doesn't mean the trend has changed to down. What this pattern may be doing is giving long traders a reason to take profits before a correction takes place. Aggressive counter-trend traders may be interested in the short-side.
Based on the main range from the May top at $115.22 to the October bottom at $75.36, crude oil exceeded a major retracement zone at $95.29 to $99.99. Selling pressure, however, was strong enough to push the market back inside of this zone, re-establishing its importance as a potential resistance zone. In addition, downtrending Gann angle resistance and uptrending Gann angle support formed a cluster of prices with the retracement zone to identify a possible topping area.
This week the retracement zone stays intact, but one Gann angle drops down to $100.72 and the other moves up to $103.36. Since the contract closed under both of these angles, it begins the week in a weak position. In addition, taking out $96.70 will confirm the weekly top and a trade through $95.29 will put the market on the bearish side of the retracement zone.
Going forward, the short-term range is $75.36 to $103.37. This range formed a retracement zone at $89.37 to $86.06. Uptrending Gann angle support from the recent bottom moves up to $89.36. This creates a support cluster and possible downside target at $89.37 to $89.36. If the closing price reversal is confirmed then traders should look for a possible break into this support cluster over the near-term.
After weeks of trading on bullish supply issues, crude oil finally fell victim to the weaker Euro and stronger Dollar and closed lower. At this time one could build a case that the weakness looks more like profit-taking after the market reached a 15-week top. I think it's safe to say that a combination of factors probably gave nervous long traders a reason to take a little off the top.
The problem developing with the Euro is not only a stronger Dollar. As you probably know when the Dollar goes up, commodities such as crude oil priced in dollars tends to get weaker. After the past year or two this correlation worked well except for times of tight supplies when crude oil took off higher on its own. The current rally in crude oil was one of those cases where the market rallied despite a weaker Euro and stronger Dollar.
This week's sell-off in conjunction with the stronger Dollar suggests that perhaps traders are once again ready to lean on the correlation between crude oil and the Dollar. Besides the short-term factors regarding sovereign debt problems in Italy and Spain, some crude oil traders may be pricing in the possibility of a recession in Europe and the subsequent spread of this economic weakness around the world.
Despite the recent slew of decent U.S. economic numbers recently, it isn't going to take much for the situation in Europe to escalate to the point where it begins to experience slow or negative growth. The Federal Reserve as well as the Bank of England is already bracing for slower growth, but even if this is already factored into crude oil prices, Europe and China could still trigger even more weakness if their economies weaken more than expected.
With crude oil falling on Friday despite an improvement in U.S. leading economic indicators in October, trader sentiment may be shifting back toward aversion to riskier assets especially since the turmoil in Europe is expected to continue. Technically, the weekly closing price reversal top suggests that crude oil may be ripe for a near-term correction of at least 50% of its six-week rally. It is suggested that you keep an eye on the Euro if you are going to speculate in crude oil futures this week.
Factors Affecting Crude Oil This Week:
Supply and Demand: Tight supplies led the crude oil market higher over the past several weeks, and it may be the reason why it tops out. On Wednesday, the U.S. EIA report showed that crude oil stockpiles declined by 1.1 million barrels for the week-ended November 11. Traders were looking for a decline of 1.5 million barrels. Although the market rallied initially, by the end of the week the market had given up all of its post-report gains. This could be a sign that perhaps demand may wane over the next few weeks. There are no new estimates for this Wednesday's report yet, but overshooting the stockpile figure may mean that analysts may have to curtail their demand outlook.
European Sovereign Debt: The European sovereign debt problems are not going to go away over the near-term and probably will still be around well into 2012 also. The question that traders are asking themselves is why is the Euro still holding above 1.30? With pressure continuing to mount on the single-currency, it seems almost inevitable that it is going to continue to weaken to a more reasonable value area. The charts indicate somewhere near 1.18 is likely. Not only is contagion a real possibility, but the possible demise of the Euro is also being tossed about by traders. All of this negativity seems to point toward a lower Euro, a stronger Dollar and weaker crude oil prices.
U.S. Economy: This week is a holiday shortened week meaning trading could be light and volatile because of low volume. Monday the existing home sales figure will be released. This is expected to be steady to lower and not really an influence on crude oil prices. Tuesday's preliminary GDP figure could be a market mover if it comes out either side of the 2.5% guess. Anything below will be bearish for crude oil. Durable goods is called lower and negative. This will not be a good sign for the economy. Personal Spending is called positive but lower. Personal Income is estimated to be positive and higher.
Iran Sanctions: The Obama administration is expected to announce plans to impose a new round of sanctions against Iran's petrochemical industry on Monday. European nations are expected to follow suit. If I know this then the major players in the crude oil markets know this too. I believe this has already been priced into a barrel of crude oil so don't expect much more than a knee-jerk reaction to the upside.