Oil prices advanced for a fourth straight week at the NYMEX soaring to a new yearly high at $81.99 before closing out the week at $80.50 with a 3.4% gain. Prices rose early in the week to fresh 2009 highs as the weak dollar continued to be the main culprit behind the rally with additional fuel coming from the weekly inventory stats. The DOE report showed crude inventories increased less-than-expected by 1.3 million barrels vs. 2.2 million expected while imports fell 8.7 million barrels, the lowest level since August 14. Refinery utilization remained near six month lows standing at 81% further supporting rallies. Strong earnings in the equities market also contributed to the oil rally. Gains were capped for the week at $82.00 on economic news as the Labor Department reported initial jobless claims rose 11,000 to 531,000 for the week ended October 17. Additionally, some technical profit taking set in as traders tooks advantage of the lofty price levels.
Despite the bullish “mask” provided by the weak dollar, it’s important to note the fundamentals do not fully support rising pirces and at some point, will have to come back into play. Looking passed the surface of the weekly inventory stats, the report showed petroleum demand remained week with gasoline demand falling to its lowest level in over five months. Additionally, inventories at Cushing rose 500,000 barrels indicating a well supplied market. In short, there’s plenty of oil out there and not enough demand to justify rising prices.
With the end-of-the-month upon us, the fundamentals expected to play out this week will be potential profit taking by funds, easing geo-political concerns and the weekly inventory stats. Additionally, keep a close watch on the dollar as crude oil has been reacting mostly off of it. Continued weakness in the dollar will keep oil prices afloat. However, any signs of strength for the greenback will most definitely put pressure on the energy complex.
Technical Outlook
The weekly trend is up with this week entering a 5 W ^ TL Channel, however, daily patterns suggested the market was becoming toppy and with Monday’s stalled rally ahead of 8200 corrective selling to started the week off. With trade closing Monday’s session below 8000, the near term tone is bearish with a sell rallies bias against 7900 to 8000 Resistance and the key downside objective at the 5 W ^ TL crossing at 7600. With the prior 2009 highs and most recent breakout at 7500, we’ll be looking for basing trade within the 7600 to 7500 range. A failure to hold the 7500 level opens the flood gates for a washout to the 7335 to 7200 key congestion support range.
The Upside Scenario: We have last week’s low at 7765 which may be enough to stave off additional selling this week. If trade is maintained above this price point, we’re likely to see a mostly range bound week between 7800 and 8200. If we fail to hold 7765, the next key buying opportunity is seen within the 7600-7500 range. Trade successfully holding this range sets the stage for a solid reversal with profit targets at 7765 to 7800, and if 7800 is reclaimed, 8000 to 8200. Otherwise, generating settlements above the 8000 mark is needed to restore Bullish health to challenge 8200 and potentially breakout to the next bull targets at 8350 up to 8500.
