Crude Oil Breaks on Renewed Demand Concerns

April crude oil futures fell sharply on Tuesday. Speculators drove the market lower before a government report on Wednesday which is forecast to show U.S. stockpiles expanded. Worries about a drop in Chinese demand also pressured prices.

Technically, the market had reached overbought levels which in layman’s terms usually means it ran out of buyers. This usually leads to a profit-taking break which drives the market into a value zone that is more attractive to buyers.

Fundamentally, investors are looking for U.S. crude inventories to increase for a sixth week to 363.6 million barrels. Traders have basically ignored this increase the past few week because the cold weather has driven up demand for heating oil, leading to speculation of increased demand for crude oil later on to help replenish heating oil supply.

Most traders feel the market has been driven by technical momentum, but it looks like the fundamentals have finally caught up and this could be bad for unprotected long traders. If traders finally recognize that demand growth is not strong especially from the emerging markets, the market may be setting up for a retracement back to $99.50.

A weaker dollar helped underpin April gold futures on Tuesday. The dollar weakened after the Conference Board’s index of consumer confidence declined to 78.1 in February from a revised 79.4 reading in January. Traders were looking for a reading of 80.0. Gold must hold the Fibonacci level at $1335.50 to support the next drive to the late October top at $1361.10.

The weak consumer confidence data also helped underpin the EUR/USD but gains were limited because of worries of additional stimulus from the European Central Bank next week. Speculators apparently are increasing bets the ECB will cut its benchmark interest rate to a new historical low. Fundamentally, German Final GDP came out unchanged.

The GBP/USD posted a strong gain. BBA Mortgage Approvals were higher than expected. CBI Realized Sales also beat the estimates. This data along with the weak U.S. consumer confidence data helped trigger a short-covering rally.