From today's point of view, it seems that the situation hasn't
changed much since last week because light crude is trading between
$105 and $107 per barrel once again, just like it did a week ago.
However, last week was very interesting and brought a significant
improvement in the oil market -- a positive change that eventually
turned out to be only temporary.
The crude market is always sensitive to Middle East conflict.
Prices rose to $115 on the unrest in Libya two years ago and to
$110 on Iran's nuclear program. During the previous week, our firm
saw similar price action.
On Wednesday, light crude surged to its highest level since May
2011 on concerns that the conflict in Syria would spread and
threaten oil supplies from the Middle East. According to Reuters,
the price of crude oil gained 2.9% and reached over $112 per barrel
as Foreign Minister Walid al-Muallem said that Syria's defenses
would "surprise" the world if the US and its allies attempted
Syria itself is not so important for the oil market, since it
produced just 164,000 barrels per day of the 28.3 million pumped in
the Middle East last year, according to
) "Statistical Review of World Energy." However, the fear here is
that a strike on Syria would lead to a broader regional conflict.
This region accounts for 35% of the world oil production. Syria
borders Iraq and is near Iran, countries that together hold almost
a fifth of the output capacity of the Organization of Petroleum
Exporting Countries, according to Bloomberg estimates.
Iran, a longtime Syrian ally, warned that a US attack on Syria
would drag the whole region into the conflict. Any use of military
force in Syria would "engulf the whole region," Foreign Ministry
spokesman Abbas Araghchi told reporters in Tehran. Russia also
warned against an attack on Syria.
In the following days, the price of crude oil dropped as the UK and
France said they favor waiting for the results of a United Nations'
investigation into Syria's alleged use of chemical weapons. On
Friday, WTI extended its decline for a third day after President
Barack Obama said he would seek authorization from Congress before
ordering military action against Syria, easing concern that an
imminent strike would disrupt Middle East oil exports.
Taking the above into account, we can conclude that the
geopolitical risk drove the market higher. Although the prospect of
imminent attacks on Syria receded, it seems that as long as tension
escalates in the region, specifically in Syria and Iran, you can
expect prices to move higher.
Another factor that fueled the price of light crude were supply
cuts in Iraq and Libya.
According to Bloomberg, Iraq will reduce daily exports of Basrah
Light crude from the Persian Gulf in September to the lowest in at
least 20 months. The Middle Eastern producer, the largest in the
Organization of Petroleum Exporting Countries after Saudi Arabia,
will ship about 52.86 million barrels, or 1.76 million barrels per
day, from the Basrah Oil Terminal, according to the plan. This is
the lowest since at least February 2012 when Bloomberg started
tracking the data and compares with 2.09 million per day this
What about Libya? The North African nation's export capability has
been crippled since members of the Petroleum Facilities Guard
seized control of terminals last month to press for better working
Libya has reduced exports as a result of oil worker strikes and
civil unrest. According to Libya National Oil Corp. Chairman Nuri
Berruien, the nation's oil output may have dropped below 200,000
barrels per day amid protests, the lowest level since 2011.
Now that we know the situation in the Middle East, let's focus on
the factor that has have been terrorizing the markets for weeks:
The Fed and its stimulus program. As the prospect of imminent
attacks on Syria receded, it seems that investors came back to
focusing on economic data and the Fed tapering once again. In the
previous week, the better-than-expected US economic data were an
additional bearish factor, which pushed the price of light crude
lower. The US economy expanded at a faster pace in the second
quarter and first-time jobless claims fell more than forecast,
which raised speculation that the Fed would reduce its $85 billion
monthly bond buying in September.
Keeping in mind these factors and their impact on the price of
light crude, let's now move on to the technical part of our oil
update. We'll take a look at the charts from different time
perspectives to have a more complete picture of the current
situation in the oil market.
Let's start with a look at the monthly chart of light crude (charts
Looking at the above chart, we clearly see that light crude still
remains above the two long-term declining resistance lines; one of
them (bold red line) is based on the July 2008 and the May 2011
highs, and the second one is based on the September 2012 and March
2013 highs (the upper black line).
The breakout hasn't been invalidated since June. Therefore, from
this perspective, the picture is bullish.
Now let's zoom in on our picture of the oil market and look at the
Quoting our firm's
last oil update
[T]he recent weeks have formed a consolidation. The inside bar
candlestick pattern is worth mentioning at this point. It is
characterized by the inside candle's price action being completely
covered by the price action the week before. According to theory,
if the buyers manage to break above the resistance level (the July
top), the price target for the pattern will be around the May 2011
Please keep in mind that there is a strong resistance zone based on
the March 2012 top and the upper border of the rising trend channel
which may encourage oil bears to go short and trigger another
On the above chart, we see that there was a breakout above the July
and the March 2012 highs in the recent days, however, the
aforementioned strong resistance zone stopped further increases.
Oil bulls showed their weakness and the pro growth scenario was not
realized. The proximity to the May 2011 top encouraged oil bears to
go short and trigger another corrective move, which took the price
of light crude back to the consolidation range.
Despite this fact, the outlook is still more bullish than not at
Now let's check the short-term outlook.
In this daily chart, we see that the situation hasn't changed much
in recent days. Although light crude climbed and reached its
highest level since May 2011, this improvement didn't last long and
the price slipped below the March 2012 and the July highs once
again. In this way, the breakout above these peaks was invalidated.
Despite this downward move, the correction is still shallow at the
moment and much smaller than the previous ones. From this point of
view, the short-term situation is bullish.
Additionally, when we factor in the Fibonacci price retracements,
we clearly see that the correction is quite small because it hasn't
even reached the 38.2% level. In my opinion, this is a bullish
Where are the nearest support levels? The first one is the 23.6%
Fibonacci retracement level, based on the entire April-August rally
(slightly above $106). The second one is a support zone (between
$102.22 and $103.50), based on the bottom of the previous
corrective move (the August 21 low) and the August low. As you see,
there is also the 38.2% Fibonacci retracement level, which
reinforces this support zone. The third one is the upper line of
the rising wedge (currently close to $102).
Summing up, although there was an invalidation of the breakout
above the July top and the March 2012 top, technically, the
short-term outlook for light crude is still bullish. The uptrend is
not threatened at the moment because the recent decline is still
shallow and smaller than the previous ones.
If you want to be an effective and profitable investor, you should
look at the situation from different perspectives and make sure
that the actions that you are about to take are really justified.
That's why you should pay attention to the oil stocks index even if
you only trade crude oil. In today's oil update, we examine the
NYSEARCA Oil Index
(INDEXNYSEGIS:XOI) to find out what the current outlook for the oil
Let's start with the long-term chart.
Looking at the above long-term chart, we can see that the situation
hasn't changed and the oil index remains quite close to the May
As we wrote in our previous oil update:
[T]he NYSEARCA Oil Index still remains above the
previously-broken long-term declining resistance line based on the
2008 and the 2011 highs and the breakout hasn't been invalidated.
Additionally, the oil index is still in the rising trend
Taking the aforementioned information into account, the situation
is still bullish.
What about the relationship between light crude and the oil stocks?
When we take a look at the above chart (and also at the chart
below) and compare the price action in both, it seems that oil
stocks were weaker in August, because they didn't reach a new local
top. However, it's worth noting that the XOI climbed above the 2011
top in May and light crude didn't make it, in spite of the recent
Let's take a closer look at the weekly chart.
On the above chart, we see that the NYSEARCA Oil Index still
remains above the medium-term support lines. Keep in mind that the
strong support line (marked in black) stopped the decline in June,
which resulted in a rally in the following weeks.
Although history didn't repeat itself in the recent week and the
XOI didn't rally as it had previously done, the medium-term uptrend
is not threatened currently, and the situation remains bullish.
Please note that we should still keep an eye on the aforementioned
support line because it is also the lower border of the rising
wedge. This is a bearish pattern, and if buyers fail, it will
likely lead to a decline that may take the oil index at least to
the lower medium-term support line (the red one).
Now let's turn to the daily chart.
From the short-term perspective, we clearly see that the recent
increases have taken the XOI slightly above the 61.8% Fibonacci
retracement level, based on the entire July-August decline. This
quite strong resistance level in conjunction with the July 30 low
(in daily closing prices) encouraged sellers to act and the oil
index dropped below 1370 on Friday. In this way, a small breakout
At this point, it's worth noting that the XOI closed the previous
week at the 50-day moving average, which still serves as support.
If it holds, we may see a pullback to the Wednesday high. However,
if it is broken the nearest support level will be the Tuesday low,
and the next one will be based on the last Wednesday bottom and the
61.8% retracement level.
Please note that the next resistance level (above the Wednesday
high) is the declining resistance line based on the May and the
July highs (currently close to the 1,404 level). If it is broken,
the buyers' next target will be the July peak, and then the May
Before we summarize, let's check the relationship between the WTI
and the XOI in the short term. Despite the negative divergences at
the beginning of the previous week, the second half looked pretty
much the same in both cases and we saw declines.
Summing up, from the long and medium-term perspectives the outlook
for oil stocks is bullish and the uptrend is not threatened at the
moment. Taking into account the relationship between light crude
and the oil stocks, we see that crude oil is still a step behind
the oil index.
Speaking of relationships, let's take a closer look at the chart
below and check the connection between crude oil and gold. Has it
changed in the recent days?
Let's examine the daily chart.
last oil update
rally in gold took place along with a rally in crude oil
. Both commodities declined after oil reached its new local top.
From this point of view we can conclude that the corrective move in
light crude triggered another move lower in gold.
On the above chart, we clearly see that the price action was
similar to what happened last week. However, this time light crude
hit its bottom a bit earlier; when we saw a downward move in oil,
gold was still rising. Nevertheless, after the yellow metal reached
its highest level during Wednesday's session, light crude
accelerated its declines.
As you see on the daily chart, this positive correlation between
both commodities continued in the following days. Taking the above
into account, I think it's worth taking a closer look at the
medium-term outlook for gold.
Let's turn to the weekly chart of the yellow metal.
On the above chart, we see that gold continued its rally in the
prevoius week and reached a strong resistance zone based on three
important levels. The first level is June's top; the second one is
April's bottom (in terms of weekly closes); and the third one is
the 38.2% Fibonacci retracement level based on the September 2012 -
June 2013 decline.
At this point, it's also worth mentioning the declining resistance
line based on the October 2012 and February highs, which
strengthens the above-mentioned area at the moment.
Connecting the dots, the medium-term situation seems quite bearish.
Yes, there was a small breakout above a strong resistance zone, but
from this point of view it was not confirmed. Additionally, the
last week's candlestick is a bearish gravestone doji.
In our last oil update, we wrote that there are periods when the
relationship between crude oil and gold works. The recent positive
correlation seems to confirm this theory. Taking this into account
and combining it with the current situation in gold, the next big
question is, will this short-term link change?
Please note that the medium-term and the short-term outlook for
crude oil is still bullish, while the medium-term and short-term
picture for gold is more bearish than bullish. From this point of
view, it seems that the acceleration of the downtrend in gold is
still ahead of us. However, even if gold leads oil down, the
uptrend in crude oil will be not threatened as long as the current
correction remains smaller or similar to the previous corrective
For the full version of this essay and more, visit
Nadia is a private investor and trader, dealing in stocks,
currencies, and commodities. Using her background in technical
analysis, she spends countless hours identifying market trends,
major support and resistance zones, breakouts, and failures. In her
writing, she presents complex ideas with clarity that enables you
to easily understand market changes and profit from them. You can
read Nadia's analyses at
where she publishes her articles on gold and crude oil