Crude oil prices soared 30% in the month of May posting its biggest monthly gain in 10 years. After a brief dip into technical support at 6000-5800 to start things off, Bull forces took over controlling the action the entire week with fresh highs posted daily beginning on Tuesday and ending Friday’s session with a 6-month high at 6664.
Along with the technical trend being bullish, the market was supported last week on solid fundamentals. The initial catalyst that got the bull running was a better-than-expected consumer confidence report with oil following equities higher on optimism of an early economic recovery. Later in the week the weekly inventory report showed a much larger-than-expected draw in crude oil stockpiles of 5.7 million vs. an expected build of 1.8 million according to estimates from a Platts survey. To top it off, a weaker dollar brought on additional buying as it makes commodities attractive alternative investments.
The much awaited OPEC meeting had no direct impact on prices last week as per their decision to leave production quotas unchanged with crude oil up over 80% from its 2008-2009 lows at 3400-3300. Instead, the group continued to urge its members to comply with current quotas to reach their desired price level of 7500. The comments alone were enough to keep fueling the oil rally.
Although the fundamentals have been strong, there are two important things to be aware of. First, much of the rise in oil has been based on optimism that an economic recovery will increase demand for the commodity. And second, it’s important to note that draws in the weekly inventory reports have mainly been due to decreased imports rather than an increase in demand as the EIA reported petroleum demand is down 7.3% in the past 4-weeks compared to the same period a year ago. In the near term, the market will remain focused on anything positive for the economy, however, this may come into play as we close in on the 7500 OPEC target.
Weekly Technical Outlook
The technical trend is bullish with the market well above its 200 DMA and in both a 5-month uptrend and a 7-week uptrend as the new month begins with this week’s key target range at 7000-7200. That being said, we’ll be looking for initial pullbacks to hold this week’s initial Support zone at 6600-6500 to support continued rallies into initial weekly Resistance at 6700-6800. Producing settlements inside or above the 6700-6800 range has bullish implications and will close in on 7000 with overall objectives at the tops of the 7-week uptrend channel at 7100 to the 5-month uptrend channel at 7180, which is also the Nov. 08 high. If we reach the 7100-7180 area, we’ll want to book profits as only a close above 7200 will give us indication of further gains targeting the 7500 mark.
The downside scenario this week will develop on a turn below the 6500 level. Trade below there is expected to encourage profit taking sell offs that will target the 7-week uptrend line within this week’s key Support range at 6300-6185. Buying opportunities will be present at 6300-6185 as trade holding here could set up a bear trap reversal back above the 6500 level. A failure to hold 6300-6185 will sustain selling pressure that is likely to extend declines to the crucial 6000 benchmark price with major downside reversal placed below there. Producing a close below 6000 on the week will set the stage for a solid drop to the 5500-5400 level in the weeks ahead.
