Inventory Decline Supports Higher Crude Prices – Crude Oil June 29, 2011 |
August Crude Oil rallied on Wednesday, but it wasn’t only the passing of the Greek austerity measures or the early strength in the Euro or the weaker U.S. Dollar that gave it a shot of adrenaline today, it was good old supply and demand.
After trading firmer most of the night, crude oil got a boost early in the trading session on speculation that Greece’s Parliament had the votes to pass the strict austerity measures that were needed to secure the first tranche of bailout money from the European Union and the International Monetary Fund.
The driving force of the early move was fueled by the stronger Euro and the weaker Dollar. The strength in the Euro led to a “risk-on” scenario while the weaker Greenback meant cheap prices for commodities that were priced in Dollars like crude oil.
After Greece announced that the austerity measures had received a favorable vote, the Euro faltered and began to weaken in what became a “buy the rumor, sell the fact” situation. In other words, traders that took the risk earlier in the week when the Euro was cheap and the austerity vote was uncertain cashed in on the up move.
The weakness in the Euro led to a light sell-off in August Crude Oil shortly after the New York opening, but long-traders stayed home, awaiting the release of the U.S. Energy Department’s weekly inventory figure. Going into the report, the market was pricing in a drawdown of about 1.5 million barrels. The actual inventories declined 4.38 million barrels, fueling a renewed breakout to the upside.
Despite the plan to dump 60 million barrels of oil on it over the next 30 days, crude oil futures proved to be resilient today, as the strong gain helped to erase all of last week’s one day loss following the announcement by the EIA to release oil from its Strategic Petroleum Reserve.
The size of the drawdown in oil stocks surprised traders this morning, putting the market in a position to rally further. Not only is there expected to be strength over the short-term, but today’s bullish report could have lasting ramifications especially if imports continue to drop and expected deliveries decline. Furthermore, news that Saudi Arabia may reduce output in response to the EIA’s action could also help underpin crude oil prices over the near-term.
In addition to the oil inventory numbers, traders should also begin to pay attention to the weather. Although nothing is in the news at this time other than a tropical storm in the Gulf near Mexico, traders should be aware that any fresh storms sighted in the Gulf region could prove to be very supportive for higher prices especially if speculators over react to the news.
Technically, a new swing bottom was formed on the August Crude Oil chart at 89.61. Typically the first leg up from a new bottom is short-covering. Fresh buying usually comes in after the market corrects the initial rally from the bottom. If this assessment holds true, then the market may retrace at least 50% of the rally from 89.61 to 95.84 over the near-term to 92.73. If a low is established at this level, then expectations are for the market to make a run at breaking out to the upside.
That scenario is about as bearish as I can get at this time because as of Wednesday ‘s close, the crude oil market brokeout over a swing top at 95.70 to turn the main trend higher.
On Thursday, a downtrending Gann angle from the 115.52 top is at 94.52. In addition, a major 50% level stands at 94.98. Sustaining rallies through both of these levels will be signs of strength and clear indications that the market is attracting enough buying power to breakout to the upside.
About the author: Commodities Mansion Analyst - James Hyerczyk
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