Crude oil prices plunged to new 2-month lows last week on bearish fundamentals, falling below $70.00 for the first time since early October. Prices for the January contract settled at $69.87, down $5.60 or 7.4% on the week, the largest one-week decline since September. The main factors driving oil lower were the dollar rebound, rising fuel supplies and weak demand.
In its weekly report, the Energy Information Adminstration (EIA) reported an unexpected decline in crude stockpiles of 3.82 million barrels vs. 250k expected. The large drop was ignored as supplies at Cushing, Oklahoma surged 8% to 33.4 million barrels, the highest since August 7. In addition, gasoline and distillate stocks posted larger-than-expected weekly gains of 2.25 and 1.62 million barrels respectively as refinery runs jumped 1.3% to 81.4% of capacity, the highest since October. Demand continues to lag with total U.S. daily fuel consumption averaging 18.5 million barrels in the four weeks ended December 4 which is down 3% from a year earlier according to the EIA.
With ample supplies in the market and weak demand coupled with end-of-the-year profit taking, prices are expected to remain under pressure as we close in on 2010. A rise in volume and open interest in recent weeks will also weigh in on crude oil as it indicates new money in the market is betting on lower prices.
Technical Outlook
The market has been in a downtrend for 8-weeks and broke key uptrend lines providing the technical reasons behind last week’s flush. The 11 and 6-month uptrends as well as the 21-week uptrend were all violated while trade begins a 9-week and shorter term 3-week downtrend, stacking the odds in favor of the Bears again this week though coming off a large sell off we could see healthy short covering early on.
Using the $70.00 to 70.50 range as a guideline, trade above $70.50, or multiple settlements above 70.00 will pave the way moderate for short covering rallies that will target this week’s key Resistance pocket at $72.50 to 74.85. With rallies from here on in expected to be short lived, any longs in the market should be exiting within the $72.50 to 74.85 range. Only stabilzed trade or a close above the $75.00 mark this week’s sets the stage for a reinforced rally that will target the top of the 9-week downtrend channel at the $78.00 to 78.65 range.
On the downside, failures to trade or settle above the initial Resistance threshold at $70.50 to 70.00 indicates prices will continue lower with the next key objective at the bottom of the current 9-week downtrend channel at $68.00. If trade does get above $70.00 to 70.50, we’ll look to sell rallies into the new key weekly Resistance pocket at $72.50 to 74.85 with the downside objective still at $68.00. Steady price action or daily settlements below the $68.00 level will open the flood gates for the next flush targeting $65.00 with the potential to extend to $63.50 to 63.00 range which marks the bottom of the shorter term 3-week downtrend channel as well as the 38% Fibonacci Retracement level of the 2009 uptrend from $32.70 to 82.00. It is recommended that sellers scale out of positions inside the $65.00 to 63.00 range.
