Crude oil futures reversed off its weekly low at $65.23 set last Monday to end the week sharply higher mainly on optimism for oil demand generated by strength in the equities markets and a weaker dollar. The weekly inventory reports showed much larger-than-expected draws in crude stockpiles of 8.4 million vs. 1.1 million expected. The draws were due in part to refineries slowing down for the seasonal turnover and less imports, yet it was clearly a short term bullish report which spurred additional buying on short covering. Also boosting oil prices last week was data showing U.S resales of homes rose 7.2% in July, the highest level since August 2007. Crude futures for October delivery surged 6.1% to close at $73.89 on the NYMEX.
The market continues to push aside the bearish fundamental reality and appears to be pricing in a best case scenario for an economic recovery. Inventories remain high while we haven’t seen an actual boost in demand and the unemployment rate is hovering just below double digits. In the short term, prices are poised to continue higher on optimism, but ultimately the fundamental reality will have to kick in and the market will be vulnerable to a 2008 like sharp decline.
Technical Outlook
Market is in a 7 W ↗ TL CHNL to start the week off with the prior congestion 2009 highs at $73.38 to 71.85 as this week’s initial Support range. Maintaining dips into this range reinforces the Bull cause with the market set to target this week’s Resistance range at $75.27 to 77.00, consisting of the October contract’s 2009 highs, the 38% Fibonacci Retracement level of the 2008 correction and the top of the 7 W ↗ TL CHNL. Producing multiple settlements above $77.00 will open the door for the next Bull thrust targeting the $80.00 mark in the near term. The $90.00 level marks the 50% Fibonacci Retracement at the 2008 slide and could be in the cards in the coming month if $76.00 to 75.00 becomes the next Support benchmark.
On the downside this week, we’ll need to monitor the price action inside the $75.27 to 77.00 range carefully. Several rejected advances within that range will wave a cautionary flag to the Bulls while providing moderate shorting signals for the Bear camp. If that scenario plays out, use the $73.38 to 71.85 Support range as a profit objective. Otherwise, the initial turnover this week is below $71.85 and expected to trigger sell offs into the $70.85 to 69.75 2nd Support range which has been a key pivotal range at these levels. That being said, good buying opportunities should be found in this range the first time down for moves back to $71.85 to 73.38. If $69.75 is violated, a solid flush is likely targeting the bottom of the 7 W ↗ TL CHNL at $66.60 down to the $65.00 mark.
