Is $100 Oil Back to Stay?
Tuesday, December 6, 2011
The price of Crude Oil has risen sharply since prices bottomed out in October, rising more than $25 a barrel from those lows. While encouraging for bulls, many traders have begun to wonder whether a more meaningful correction or period of consolidation may be on the horizon and whether Europe could stall global growth. Technically, 102.50 and 95.00 are two levels for traders to keep a close eye on, as a move outside of these boundaries will likely set the tone for the market in the near-term. That being said, some traders may perhaps wish to consider going long a mini or full-sized Crude Oil contract on a significant close above the 102.59 level. Conversely, on the downside, some traders may want to give some thought to taking a short position in the market on a close below 95.00.
Fundamentals
Crude Oil futures are lower this morning, as possible downgrades to German and French credit ratings hang over the market. Oil has been riding high lately, driven by the resurgence in equity prices. While many equity and commodity traders have been pointing to the positive economic data of late, there are holes in some of those numbers. The unemployment rate unexpectedly dropped to 8.6%, after an increase of 120,000 jobs in November. However, when taking into account that over 300,000 workers were removed from the pool of potential job seekers, the number does not seem all that strong. The strong showing by consumers during the kick-off to the Christmas shopping season needs follow through for traders to take those numbers seriously. S&P is expected to downgrade French debt and the ratings agency may also downgrade German debt as a result of the contagion of European debt problems. The French and German economies themselves are not the cause of the potential downgrades, but rather, it's the fact that the two nations share the same currency unit and have taken it upon themselves to rescue their neighbors that has created the issue. If the US economy can show that it can continue to create jobs and consumers keep spending during the holidays, some of the economic concerns may begin to slip from traders' minds and we could see $100 Oil here to stay. Traders also have to be mindful of the products component of this week's EIA report. While Crude Oil is expected to see a draw of one million barrels, both gasoline and distillates are forecast to show builds of over a million barrels. A surprise draw in either product could support the recent rally in prices.
Technical Notes
Turning to the chart, we see that the price of the January Crude Oil contract shot above the $100 mark in mid-November, only to retreat to the mid-90's before once again moving north of the $100 level. The second move above the century mark was not as rapid as the first and did not trigger overbought conditions. However, the chart shows signs of a possible double-top being in the works if prices do not hold above 95.00. A move above the recent high of 102.59 may ease many traders' concerns that a double-top may be in motion. The 20-day moving average has acted as support for the contract, so some traders may want to keep a close eye on how the contract behaves near the average. The upward crossover of the 50 and 10- day average can be seen as positive for prices.
Rob Kurzatkowski, Senior Commodity Analyst
