Crude oil prices fell for the fourth week in a row to its lowest level in six weeks at $58.72 while posting losses 4 out of 5 sessions last week. The market has been under pressure off of a classic double top pattern at the 2009 high at $73.38 from the technical perspective with the fundamentals lacking evidence of an economic recovery. The dollar has been strong recently, thereby reducing the appeal for oil as a hedge against inflation but the real story behind the selling is overall weak demand for petroleum products. Additional pressure came on as the CFTC spooked the market as they announced they’ll be exploring the need for government imposed restrictions on speculative trading in the energy markets. In the end, crude oil plunged 10 percent on the week settling below the $60.00 mark for the 1st time since mid-May.
As we’ve been discussing in our previous reports, the market was being driven higher on the perception that the economy was recovering and therefore would boost demand for oil in the future. However, the hope of a recovery has quickly faded away as a whopping 467,000 jobs were lost in June sending the unemployment rate to a quarter-century high of 9.5 percent resulting in the slack in demand we’ve been seeing. Last week’s inventory report illustrated the weak demand as gasoline stockpiles grew 1.9 million barrels to 213.1 million in the week ended July 3 and consumption of distillates dropped to a 10-year low sending inventories to the highest since 1985. Crude oil inventories fell 2.9 million barrels, but the drop had little importance as total petroleum inventories rose to 1.11 billion barrels, the highest since 1990.
Technical Outlook
The market technicals have turned bearish on the confirmed double top at $73.38 with an overall ‘sell rallies’ bias going forward, however, the shorter term technicals are hinting at a short covering burst early this week. Last week’s low off of the broken 4-quarter downtrend line (4 Q v TL) at 5865 supported minor recovery trade ahead of the weekend while this week is set to break the 3-week downtrend line (3 W v TL) on its open, making up the initial weekly support zone at $58.75-58.00. Trade holding this zone followed by either steady action or settlements above the $60.00 mark sets the stage for a short squeeze that will target the $61.50-63.00 range. If the Bulls gain enough steam to power through $63.00, an extension to the key breakdown area at $65.00 is in the cards.
Sellers Market
If the upside scenario plays out, Bears will be looking to sell into the $63.00 to 65.00 range with the anticipation of failing $65.00 and resuming sell offs in the days and weeks ahead with the next major downside objective at $56.00 to 54.65. Otherwise, if the Bears defend the $60.00 level and subsequently take out $58.75 to 58.00 support, expect a continuation to the lower 22-week uptrend channel (LWR 22 W ^ TL CHNL) at the $56.75 area initially, and then on to the $56.00 to 54.65 objectives. There is solid wood seen at $54.65 as that price was the major upside breakout point for 2009 and now holds the new 3-quarter uptrend line (3 Q ^ TL) crossing there as well. That being said, we have a strong buy recommendation there with a high probability of a significant reversal developing if it holds. A failure to hold $54.95 indicates an extremely bearish market that will be open to a flush to the $50.00 mark.
