Crude Oil Mid-Week Analysis for the Week of December 12, 2011

Technically, it looks like distribution is taking place in February Crude Oil, but one can’t be certain until the last major low at $95.16 or for that matter the 50% level at $95.15 is penetrated. The first sign of weakness took place four weeks ago when the market posted a closing price reversal top at $103.28. The confirming break which followed should have led to a 2 to 3 week break equal to at least half of the last rally. This could still occur, but a few moves have to take place first.

One move that has to take place is the penetration of the downtrending Gann angle at $98.57. This should then lead to a break through the uptrending Gann angle at $95.73. Once traders begin to see the shift in sentiment then they are likely to pile on the short-side. Once $95.15 is cleared, the charts indicate there is plenty of room to the downside. Based on price and time protections, February Crude Oil could trade down to 50% of the last rally from $75.73 to $103.28. This makes $89.51 a potential downside target by the week-ending January 13, 2012.

This scenario will be negated if the closing price reversal top is taken out. If this occurs then the market may spike to the upside with the downtrending Gann angle at $106.57 the next likely downside target.

With the technical picture laid out, what must happen fundamentally to trigger the break to the downside?  One would have thought that the tanking of the Euro would have fueled a rapid exit from the crude oil market, but instead the market has held up quite nicely. This just proves what we have known for months that crude oil has decoupled itself from the Euro. If traders suddenly wake up and see the strength in the U.S. Dollar then maybe crude oil will trade like it did before, latching on to every down move in the Greenback. If the Dollar continues to rise then the longer crude oil stays up here, the harder the break once traders begin to exit their positions.

Pressure on the equity markets could also trigger a break in crude oil if global investors decide to deleverage from equities and commodities at the same time. It’s just a matter of how much risk big institutions and hedge funds want to be exposed to at this time.

Tuesday’s mention by the U.S. Federal Reserve that the European crisis has the global economy in turmoil at this time can’t help matters either. This type of talk by a central bank should at some time trigger weakness in the energy complex because it may have been the Fed’s fancy way of saying there’s another recession coming. While this may not hold true for the U.S., Europe is definitely in the firing line for a slow growth period. This should curtail crude oil demand, leading to lower prices.

Price manipulation by algorithmic traders is being blamed by some for the firm prices, but if the Dollar continues to rise and equity prices continue to fall then margin call selling pressure could trigger a mass exodus by these traders in the crude oil market.

This leads us to what may be the main reason why the market is holding its ground:  speculation that military activity may take place in the Middle East with Iran being the aggressor. It looks as if bullish traders are focused more on Iran and the possibility of a supply disruption caused by the blockage of the Strait of Hormuz.

Factors Affecting Crude Oil This Week:

• U.S. Supply and Demand:  Talk of a recession in Europe is one reason why demand may drop, however, a supply disruption could be bullish. Tough call for oil analysts. It looks as if market estimates may be all over the place this week. A cut in supply could trigger a spike to the upside. Buyers may be loading up on crude oil for protection against a conflict in the Middle East.

 

• Euro Zone:  The falling Euro doesn’t seem to be an issue at this time since crude oil and the single-currency have decoupled. However, at some point, strong signs of a Euro Zone recession may begin to limit upside movement in crude oil.

 

• Middle East Tensions:  Simply stated, Iran is a wildcard. If it shows aggression in the Strait of Hormuz then U.S. military action may follow. This would trigger a huge move to the upside.