Crude Oil Traders Eyeing Euro for Direction – Crude Oil June 28, 2011 |
The tight trading range in the August Crude Oil the past two days suggests that the market is not too worried about Wednesday’s Strategic Petroleum Reserve auction but rather the outcome of the austerity vote in Greece later this week.
For the second time in a week, Greece Prime Minister George Papandreou’s role as a leader will be called into question. Last week he was fighting for his career while campaigning for a vote of confidence, this week he is trying to persuade Parliament to approve strict austerity measures designed to prevent a Greek bond default. By getting these measures passed, the European Union and the International Monetary Fund is expected to release the first tranche of aid to Greece so that the country can avoid default.
Last week crude oil sold off sharply after the U.S. and its allies announced the release of 60 million barrels of crude oil over the next 30 days from their Strategic Petroleum Reserves. Traders acted swiftly and with conviction with the release of the news on Thursday, but since then, the market has traded sideways as if traders had already shifted their interest to another story.
That story is the austerity vote in Greece. Despite the fact that there is going to be a petroleum auction on Wednesday to distribute the crude oil pulled out of the reserve, the market doesn’t seem to care, apparently having already priced the event into the market. The only way it seems that oil will break is if there are no bids on the oil and the government is forced to sell oil at a deep discount to the market. This is a possibility since it is widely known that there is plenty of oil at the refineries.
This leaves us to consider the Euro’s impact on the crude oil market. When crude oil broke sharply last week, the U.S. Dollar rallied and the Euro weakened. This relationship is key to understanding what can happen to crude oil this week. If Greece gets its money, the Euro is likely to rally sharply higher in a relief rally. At the same time, the U.S. Dollar should tank as traders will abandon their safe-haven mentality and shift their sentiment to risky investors.
Traditionally, when the Dollar weakens, investors flock to commodities. We saw this take place over the last year. When the Fed provided close to a in stimulus, the Dollar fell, sending commodities like crude oil, gold and silver higher. Since traders are creatures of habit, expect them to react the same way. This puts August Crude in a great position to rally.
Should the Greek deal fall apart, then look for the Euro and all risky assets to plunge.
What makes crude oil attractive is the current price level. Last week’s sell off didn’t occur when the market was at a high. The August contract was already down close to $20 before the oil news was released. This means that crude oil may be oversold and already at a support level. This support price is the 61.8% retracement level of the May 2010 to May 2011 range of 74.43 to 115.52.
Although crude oil could bottom from this price, the market is not going to show any strength unless it regains a 50% level at 94.98. In addition, the main trend will remain down until the swing top at 95.70 is violated.
It’s too early to tell what the impact of a higher Euro is going to have on crude oil. Although a higher Euro is likely to mean a rise in crude oil prices, no one is sure if it means the market will attract enough buying power to turn the main trend to up.
About the author: Forex Mansion Analyst - James Hyerczyk
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