By James Hyerczyk
Commodity Trading Advisor
August crude oil futures traded sharply lower on Wednesday after an increase in supplies surprised traders encouraging some of the speculative longs to exit their positions. Adding further to the weakness was the lack of interest in the long side due to the upcoming U.S. Federal Reserve policy announcement.
Wednesday’s EIA report showed that crude oil supplies rose by 2.9 million barrels in the week ended June 15. Pre-report estimates were calling for a decline of 600,000 barrels. Although analysts guessed correctly that the current economic slowdown and turmoil in Europe may trigger a drop in demand, they certainly missed the mark when it came to the actual effect.
With some traders on the sidelines ahead of the Fed statement and a press conference by Chairman Ben Bernanke, crude oil participants were hopeful that talk of additional stimulus would drive up demand forthcoming. Instead, Wednesday’s report showed that the market may have to struggle to participate in the upside along with equity markets and other commodities which are expected to act positively to the additional stimulus.
Unless traders overlook Wednesday’s worse than expected inventory number, crude oil may finish the day on its low, however, technically it does seem ripe for a bear trap due to a pair of bottoms at $81.53 and $81.39. Even as August crude oil approaches these bottoms with strong downside momentum, it is possible that traders may turn the market higher if the Fed delivers a better than expected message.
Although the supply and demand situation is casting a pall over crude oil this morning, there is still one event which may stabilize prices and perhaps drive them higher over the near-term. This is concerns that tensions between Iran and the West could rise again ahead of the European sanctions that are due to begin in July. Sabre-rattling from Iran may be enough to drive speculative buyers back into the crude oil market, triggering the start of a short-covering rally and perhaps attracting fresh buying.
Technically, August Crude Oil is set up for a rally due to the developing double-bottom formation. Besides having to hold both bottoms at $81.53 and $81.39, the true confirmation of this chart pattern will be a breakout over the last top at $87.32. If this occurs, then expectations are for the market to rally at least equal to the difference between $87.32 and $81.39. This $5.93 range could trigger a rally to $93.25 over the near-term.
Based on the main range of $106.99 to $81.39, another upside target zone has formed at $94.19 to $97.21. A rally into this price zone will represent a 50 to 61.8 percent retracement of the major break from early May to June. Besides breaking the swing top at $87.32 which will turn the main trend up on the swing chart, a breakout through the downtrending Gann angle currently at $89.49 could trigger a further acceleration to the upside.
With investors waiting to see if the U.S. Federal Reserve will adopt further monetary stimulus to counter a weakening economy, crude oil traders expected to see some weakness, but due to thin trading conditions ahead of the key Fed announcement, traders may have over-reacted to the downside. This move may be remedied by better than expected news from the Fed.
Technically August crude oil is still holding a pair of bottoms and set-up for a possible breakout rally. This is likely to occur if the Fed announcement can stabilize Wednesday’s report losses and outside events create uncertainty in the crude oil market. Crude oil is a market to watch at this time especially if stocks and commodities continue to strengthen and Iran decides to shake up the market.