Sour Crude?
Fundamentals
Crude Oil futures have been losing ground recently, on stockpiling in the US and recent strength in the Dollar. The Dollar has not been gaining strength on its own merits, but rather concern that Japan will look to weaken the Yen and questions about the creditworthiness of England. It is somewhat surprising that Oil has slipped the way it has in recent weeks, considering the mild improvement in the labor market, which has gone from hemorrhaging jobs to trickling them away. Oil traders tend to be very forward-looking, and this would normally be considered a bullish development. Bulls have also been very keen on Gold, so the recent meltdown in the price of the metal may have forced some longs out of the market due to margin calls and shaken the overall resolve of traders in commodities. More directly related to petroleum, traders are concerned that the recent stockpiling reported by the EIA may create a glut that will be difficult to work down, even if the economy is able to make further strides. There are also questions surrounding the employment data and whether the data may be slightly misrepresented because employers are not eliminating jobs around the holiday season. For the time being, it looks as though the bears have the upper hand until the bull camp can find some positive factors to latch onto.
Trading Ideas
Crude Oil fundamentals have somewhat weakened recently, due to the large supply of product on the open market. However, the employment picture does seem to have improved, which could prevent a complete collapse in prices. Many traders believe that Crude Oil, like Gold, may have gotten a bit too far ahead of itself, which has been one of the major reasons for the recent selling. The chart does seem to be indicating the possibility of a further technical breakdown. Some traders may wish to take a wait and see approach, waiting for several solid closes below the 70.00 level before considering taking on a bullish position.
Technicals
The February Crude Oil chart shows prices breaking down below a relatively critical support area near $75. Prices are quickly approaching the next major support area near $70. For the Oil market to right the ship, prices will likely have to bounce back above the previous support line around $75. Further declines, on the other hand, could be a signal that the uptrend in Oil prices may be over and the market may see choppiness – or, possibly a new downtrend develop. The RSI has fallen to oversold levels, suggesting that the selling pressure seen over the past week may begin to cool off a bit. Momentum has remained relatively flat during the heavy selling, giving further indication of possible near-term strength.
Rob Kurzatkowski, Senior Commodity Analyst
