Crude oil prices topped the 7000 mark for the first time in six months to start off the month of June after surging more than 30% in May. The market participants continue to focus on bullish variables, such as a weaker dollar, solid equities and improving economic data along with a strong technical picture while pushing aside any bearish fundamentals. Last week’s bull extension came from a positive manufacturing report from China, a decline in jobless claims in the US, Goldman’s increased oil forecast to $85, with the final boost to 7032 on a better-than-expected unemployment report for the May. The Labor Department reported 345,000 jobs were lost, much lower than analysts expectations of 500,000. Oil backed off of 7000 as the dollar stengthened on Friday to end the week at 6844.
As we mentioned in prior reports, the rise in oil prices has mainly been driven by the improving macro economic picture spurring the perception that demand for oil will increase. However, the fundamental reality is that demand has not increased and remains weak while inventories remain high at 366 million barrels, with last week’s addition of 2.9 million barrels. Demand for the past 4-week period is down 7.7% compared to the same period last year. Additionally, despite OPEC’s best efforts to meet quotas, production has ramped up as its members try to take advantage of the higher prices. This is a definite cause for concern in the coming weeks, especially as we move into the OPEC target range of 7000-7500. For now, we expect more of the same, traders leaning towards the bullish news.
WeeklyTechnical Outlook
As stated above, the technical picture is bullish with the market in an 8-week uptrend channel and a solid daily uptrend channel though with both the weekly and daily charts showing room for mild corrective pullbacks. To start the week off, we may see some early defensive action coming off of the 7000 level against this week’s initial Resistance zone 6845-6960 while looking to ‘buy dips’ against key weekly Support at 6660-6500. With the 8-week uptrend channel ( 8 W ^ TL CHNL ) crossing at the lower end of Support, maintaining trade above it will set the stage for resumed bullish drives with trade above 6960 setting off follow through rallies to the next key target range at 7140-7200. Producing any daily settlements above 7200 will pave the way for extensions to the 7400-7500 upper OPEC target zone.
A significant downside scenario will develop if trade fails to hold above 6500 this week. A drop below 6500 will break the 8-week uptrend thereby setting off sell offs initially to the 6400-6380 area. Steady trading or any daily closes below 6500 will gear up for a solid correction targeting the May breakout area at 6226-6185 with the potential for a flush to the 6000 mark. Bears should be looking to book profits against 6226-6185 with a final exit around the 6000 area. If these lower levels area reached, long term Bulls will have an opportunity to scale into positions at 6226 down to 6000 with the 38% Fibonacci retracement of the 8-week uptrend crossing near 6000. Only a close below 6000 suggests the Bear camp will have staying power in the weeks ahead.
