Outlook of Crude Oil Depends on $95 Level
During this week, Crude Oil broke above $95. This is very important because this level is the 50% Fibonacci retracement and where the 200-day moving average sits, which are very important levels to any technical analyst.
The commodity has been in a mid-term bear trend since April/May, moving from over $114 to a little below $75 in the beginning of October, representing a 34% decline. Since the October bottom, Crude has been in a short-term bull trend and continued through its mid-term downtrend resistance line.
Benzinga made it known when Crude was approaching this downtrend level at around $85 and projected the most likely scenario for the commodity to be a successful test and break of this level, advancing the bull move.
Since the original post, the commodity has moved about 15% higher.
For the current week, Benzinga's Weekly Radar (a newsletter highlighting technical levels and analysis for the week ahead for major markets) highlighted a potential bearish move in Crude, as the commodity was hitting the major $95 resistance level, was forming a bearish Rising Wedge pattern, and was showing divergence with the Relative Strength Index (RSI).
The possible move lower in Crude has not come to fruition. Instead, it has broken above the $95 resistance level and even rallied above $97.50. To quote John Maynard Keynes, “Markets can remain irrational longer than you can remain solvent.” So we will see if this break above the bearish Rising Wedge pattern is just a false breakout; only time will tell.
The break above $95 is likely driven by two scenarios. One scenario came today when the Department of Energy released its inventory data. Crude reversed its earlier trading course after the report showed a supply drop of 1.37 million barrels versus an estimated 500 thousand-barrel rise. This scenario is obviously a short-term factor, as stockpiles change weekly.
The other scenario and the more likely one is the civil unrest in the Middle East. The International Atomic Energy Agency (IAEA) released a report yesterday blaming Iran and specifically its nuclear program for development relating to nuclear arms. The report claimed, citing a credible UN source, that Iran carried out efforts applicable for developing nuclear weapons.
Even with ex-Libyan dictator Muammar Gaddafi dead, unrest in the Middle East remains mainly because of the possible attack by Israel on Iran's nuclear program. This could obviously cause supply shortages, pipeline shutdowns, etc. However, economic growth in emerging markets, including China, is currently slowing. This should mean less demand for oil, and the price should decline. There are conflicting themes: some pulling the case for bullish action and the other for bearish.
For fundamental investors, the future of Crude could rest on the Middle East or China. For market technicians, the commodity depends on the $95 level. As stated before the $95 level is a psychological for traders. It is also where the 200-day moving average currently sits and the 50% Fibonacci retracement level, both strong technical levels.
With the current hold of $95, the short/mid-term range for crude will likely stay between $90 and $100. The commodity could test $100 fairly soon, even if there is not any further developments in the Middle East.
Technicians will look at this move above the bearish Rising Wedge pattern in the near-term to see if it is a false breakout. If Crude breaks and holds below $95, it will be seen as bearish action and the $90 level will come into play. With a break below $90, the commodity could fall back to the October lows of $75, as projected from the Rising Wedge pattern; however, this case is unlikely.
With the problems in Europe continuing to unfold, it will be interesting to see where Crude goes from here. Traders must be cautious as any global/macro headline could cause sharp moves in the price.
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