Crude Oil Breaks as Syria Concerns Soften

After reaching a two-year high on Wednesday, October crude oil prices finished lower today. The selling pressure actually began yesterday following a rally to $112.24. The catalyst behind the sell-off on Wednesday was the weekly U.S. Energy Information Administration (EIA) report which showed crude oil inventories increased by 3 million barrels last week.

Overnight, prices weakened as investors softened their view of the impact an attack on Syria by the U.S. would have on supply. Currently, U.S. crude oil inventory sits at 362 million barrels, or near the upper limit of the five year range for this time of the year.

Speculators also decided to pare positions after U.S. President Barack Obama said an attack on Syria would be “tailored, limited”. The changed the view of many who believed the attack would lead to prolonged military activity.

Technically, the market is trading on the weak side of uptrending support at $109.50. This puts the market in a position to test the retracement zone at $107.87 to $106.84.

December Gold prices also traded weaker as investors softened their view of the potential military action against Syria by the U.S. A strong surge in the U.S. Dollar also contributed to the weakness in gold. This morning’s better-than-expected weekly jobless claims data and preliminary GDP report is causing some investors to lean toward the Fed tapering its monetary stimulus in September. This is triggering a rise in interest rates, making the U.S. Dollar a more attractive investment.

The stronger U.S. economic data is also triggering a sharp drop in the EUR/USD. After trading inside a range for several days, the Forex pair broke through support and is now threatening to take out the recent bottom at 1.3205.

Today’s action suggests investors are strongly betting the Fed will begin reducing its monetary stimulus as opposed to later in the year. This came as a bit of a surprise since volume is down ahead of the U.S. holiday on Monday and it was assumed that many investors were heading to the sidelines while awaiting the latest Non-Farm Payrolls report on September 5.

Selling pressure also pushed the GBP/USD lower, however, the impact of the strong U.S. economic data was not as strong since the market had sold off for five days since topping at 1.5717. Today’s better GDP data strongly suggests the Fed will begin reducing monetary stimulus in September at a time when the Bank of England is still considering additional stimulus if the economy weakens.

Technically, the market may be oversold on a short-term basis which explains today’s inside move, however, the fundamental news may be too much to overcome, indicating further downside pressure is likely. The market will change the daily trend to down and could accelerate to the downside if 1.5422 is broken with conviction.