Crude oil prices snapped a 2-week win streak last week on concerns of over supply and weak demand while the Goldman fraud charges sent shockwaves across the board sending crude, gold, and equities spiraling lower to close out the week. Spot month crude oil lost $1.68, or 2% on the week while the June contract, which takes the spot position on Wednesday, lost 1.2% on the week to close at $84.68. Volume on the NYMEX reached 5 million contracts due in part to long liquidation.
The resilent Bulls bought into weakness early in the week, taking advantage of a pullback to technical Support against a key weekly bull trend line while following equities to new yearly highs on strong earnings from Intel Corp and JP Morgan Chase & Company.
On Wednesday, a surprisingly bullish inventory report catipulted the market to its best levels of the week at $86.39. The DOE reported a decline of 2.2 million barrels, the first draw in crude stocks in 11-weeks. Analysts had forecast a rise of 1.3 million barrels. Supplies fell as refineries ramped up utilization by 1.1% to 85.6% of capacity. Imports fell 7.1% to 8.8 million barrels per day.
Rallies faded on Thursday as the dollar strengthened thereby spurring moderate profit taking while the Goldman shocker kicked in on Friday sending prices plummeting to $82.51. The SEC charged Goldman Sachs and one of its vice presidents of defrauding investors in connection with subprime mortgage derivatives. According to the SEC, Goldman misstated and omitted key facts about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter.
Although much still needs to be learned about this case, it was enough to spook investors into taking some profits and quite possibly could be the start of a major correction in oil as well as gold and equities as this investigation unfolds, offsetting recent confidence and optimism on the economy.
Technical Outlook
The technical picture starts off bearish this week for several reasons. Friday’s sell off produced a settlement on the week below the 1st Quarter breakout high at $83.95 while the daily chart depicted a bearish ‘Evening Star’ reversal pattern which prompted an open Sunday in violation of the major 12-week uptrend line drawn from the $69.50 level. Confirming the bearish technicals was the cross below both the 10-day and 20-day moving averages on the record volume week. Lastly, the weekly chart shows us in a developing 3-week downtrend channel. As the May contract expires on Tuesday, we’ll focus on the more active June contract with an initial sell rallies approach.
Downside: Initial Resistance for the week is expected to be seen inside the $83.00 to $85.00 range while the Bears key in on the 50-day and 100-day moving averages as well as a 9-week uptrend line making up the $81.50 to $80.00 weekly Support range. Sellers can take a scale out approach in this range as we can anticipate short covering and position squaring against the psychological $80.00 price level. Posting settlements this week below $80.00 reinforces bearish trading and generates a secondary selling wave targeting $79.00 down to $77.00 for the week.
Upside: If the prices dive into the $81.50 to $80.00 Support range and fail to produce settlements below $80.00, be on guard for a short covering reversal unfolding and targeting the Resistance range at $83.00 to $85.00. Any buyers inside the $81.50 to $80.00 Support range should take a scale out approach at $83.00 to $85.00. Settlements above $85.00 are key to turning momentum back to the Bulls this week for rallies back into the $86.00 to $87.60 range containing the yearly highs at $87.09 for spot and $87.59 for the June contract. Closing the market out above $85.00 for the week brings back talk of the $88.00 to $90.00 range for next week.
