The Bulls remained the dominant force in the market last week on the continued combination of strong technicals and fundamentals, sending crude oil to 7-month highs at $73.23/barrel at the NYMEX. Early technical action held the 8-week uptrend last week and prompted rallies all week to the top of a 3-month up trend channel pinned at the highs. The top of the channel provided a technical reason for end of the week profit taking.
Fundamental support for the week was provided by another surprise draw down in crude inventories of 4.9 million barrels while expecations called for a build of 100k barrels. Gasoline inventories fell 1.5 million vs. an expected increase of 750k. Other bullish news came from the International Energy Agency (IEA) raising its global demand forecast for the first time in 10 months by 120,000 barrels based on consumption from the US and China. Overall weakness in the dollar also continues to drive investors into commodities, however, a rebound in the green back on Friday helped fuel profit taking off of the technical highs to close out the week with a settlement at $72.04/barrel.
Fundamental Concern
Investors remain focused on positive economic news; however, as we’ve been warning much of the rally in crude oil prices has been based primarily on optimism of a recovery. While inventories have been decreasing and painting a picture of rising demand, the actual reason for the draw down has been a result of fewer imports. Crude oil imports last week dropped 679,000 barrels to 8.97 million. Supplies should continue to decline throughout the summer months as refiners continue to reduce imports and work off their large inventories, but bear in mind that overall demand has not picked up. Additionally, OPEC stated it would only raise production at $100 oil, yet, production increased for a second straight month in May indicating its difficulty in getting members to comply with current output quotas. In the short term, price action will likely be biased to the upside on bullish investor sentiment; however, the market is vulnerable to a significant correction when the fundamental reality kicks in.
Weekly Technical Outlook
The market remains in solid monthly, weekly and daily uptrends with this week beginning a 9-week uptrend channel (9 W ^ TL CHNL-Chartwhiz symbology). The market may start off with another round of profit taking following Friday’s sell off, but with the overall trend up, look for good buying opportunities against the initial weekly support range at 7050-6850. If the Bulls can successfully defend this support range, we aniticipate a rally back to last week’s highs at $72.63-73.23 and overall move to nail the $75.00 OPEC target. There is room for extensions above $75.00 to the 38% Fibonacci retracement level of the 2008 range at $76.35 up to the top of the 9 W ^ TL CHNL at $77.00 and potentially to the $80.00 area. However, any stalling action between $75.00 and 77.00 will keep us alert for any reversal signals developing.
On the downisde, the major technical turnover is expected to be triggered below the 9-week uptrend line crossing at the lower end of weekly support at $68.50. Trade that violates $68.50 will set the stage for a wave of heavy corrective sell offs with an initial target range at the next key support area from $66.50-65.00. Any settlements below $65.00 will reinforce short term bearish control with an extended objective for the week at the late May breakout area at $62.00 down to 60.00. If the $62.00 area is reached, Bears should be locking in profits while Bulls look for fresh long term buying opportunities as trade should find a supportive base against the $60.00 level.
