Crude oil prices dropped for the second straight week losing nearly 5% to close below $75.00 for the 1st time since late December as concerns over weak demand spooked investors. Crude oil for March delivery settled at $74.54 posting a week-on-week loss of $3.46. Also contributing to the decline were fears of a slowdown in China and weakness in the stock market prompted by President Obama’s proposed reforms on U.S. banks which sent the Dow tumbling 436 points to close on 9-week lows.
The DOE reported last Thursday a drop of 471,000 barrels of crude stockpiles and a draw of 3.3 million barrels of distillates while gasoline inventories gained 3.9 million barrels, a bigger increase than analyst projections of 2.1 million barrels. The key bearish ingredient to the report was the large decline in refinery utilization. With a weak demand outlook, refineries slipped 3% in the U.S. to 78.4% of capacity, the lowest level since 1989 barring storm disruptions. In addition, crude oil imports were down 355,000 barrels/day from the prior week.
Crude prices rose off the open of the new decade to $83.95 a barrel, mainly attributed to an arctic blast across the U.S. However, despite the record cold temperatures, supplies remained high further indicating that overall demand is weak. Supply and demand will remain at the forefront throughout the 1st Quarter with the current stats likely to keep an overall bearish sentiment on oil. Rallies from here on in are expected to be short lived unless we begin to see a significant shift in the inventory stats.
Technical Outlook
The market remains biased to the downside as last week’s sell off confirmed a weekly bearish engulfing pattern from the double top at the yearly highs at $83.50 to 83.95. In addition, the daily trend is down with prices settling below the 100-day moving average setting a ‘sell rallies’ bias against initial weekly Resistance at $75.50 to 77.00. Failed rallies into this range will set a downside target range this week at $73.50 down to 72.00, consisting of key longer term weekly and monthly uptrend lines. Sellers should scale out of positions within the $73.50 to 72.00 range. Settlements below 72.00 this week violates the long term uptrends and reinforces the Bear Camp bringing $70.00 to 68.00 into play throughout the week and into the next.
On the buy side, trade testing and holding the major weekly uptrend line at $73.50, or failures to take out the current 2010 low at 74.00, offers buying opportunities to catch a short covering rally into the ‘sell zone’ at $75.50 to 77.00. Otherwise, buyers can scale into long positions inside the $73.00 to 72.00 Support range as trade holding down there is expected to shift momentum to the upside later in the week. The intial upside breakout for the week is placed above $77.25 and should propel prices to the next weekly Resistance range at $78.00 to 80.00. Longs will want to scale out of positions against $78.00 to 80.00 as only settlements above 80.00 will shift the sentiment to the Bulls targeting $82.00 to 84.00 in the days/weeks to come. Any signs of stalling momentum inside the $78.00 to 80.00 range presents a secondary shorting opportunity for the sellers with trade likely to gravitate back towards $75.00.
