Crude Oil Finishes Week Lower on Supply Concerns

December crude oil futures are set to finish the week sharply lower. This week, West Texas Intermediate crude also joined Brent crude in officially turning into a bear market. This occurs when a market declines to 20% below its peak.

Rising global supplies and falling demand are the catalysts behind the selling pressure. Production is soaring in the U.S., Russia and Saudi Arabia. In the U.S. shale oil is helping to boost crude oil output the most in more than thirty years. Russia is selling crude oil to raise cash since it can’t borrow because of the sanctions imposed by Europe. OPEC production is rising. Saudi Arabia, the world’s biggest exporter, was expected to cut production, but instead slashed customer prices to Asia.

This week, the IMF reduced its global forecast for 2014 and 2015. Compounding the supply and demand problem was this week’s Fed minutes which expressed the central bank’s concerns about the slowing global economy.

The forecast is for lower prices, however, traders should watch for periodic waves of short-covering rallies. Hedge and commodity funds are extremely short, but at times may alleviate the pressure on the market by lightening up positions and taking profits. Because of the bearish fundamentals, these short-covering rallies are likely to be sold.

December Comex Gold futures are trading lower today, but are in a position to close higher for the week. Oversold technical factors helped boost prices, but the biggest influence on the market was the weakness in the U.S. Dollar. Most of the rally was short-covering and profit-taking. This means traders are still bearish, but are waiting for more favorable price levels to re-enter on the short-side.

The EUR/USD is trading lower following a technical reversal top on Thursday. Even with today’s lower price action, the Forex pair is set to close higher for the week. Most of the rally was short-covering, fueled by position squaring, following last week’s European Central Bank’s decision to refrain from any additional stimulus at this time.

The mere hint at additional stimulus is likely to lead to fresh selling pressure as evidenced by yesterday’s sell-off. The EUR/USD was in a positon to post a nice gain for the week when ECB President Mario Draghi killed the rally by mentioning “excessively low” inflation. This led to speculative selling  because traders interpreted this to mean the central bank was seriously considering implementing fresh stimulus measures.

The GBP/USD sold off on Friday on bearish construction output news. According to the Office for National Statistics, U.K. Construction Output shrank by 3.9 percent in August. Investors were looking for a slight increase of 0.5%. Support for the British Pound is expected to continue to erode because of value issues. Some traders feel the Sterling is overvalued and likely to head lower as the economic crisis in the Euro Zone exerts a bearish influence on the U.K. economy.