Chartwhiz Weekly Crude Oil Report-4.13.10 (USO)

Crude oil prices surged early on last week above the 1st Quarter high at $83.95 set back in January fueled by optimism that an economic recovery will bolster demand in the U.S. Positive economic news, most recently seen in the jobs report which showed 162,000 jobs created in March, triggered a buying frenzy to a 17-month high at $87.09. An expansion in U.S. service industries in March assisted in the rally as it suggested the recovery may be expanding beyond manufacturing.

The tables turned mid-week through the end of the week as larger-than-expected gains in inventories and a surge in imports raised doubts on future demand as the robust supplies fail to support the recent price hike. Technical resistance at the $87.00 area, coupled with the bearish DOE report, triggered a 3-day profit taking set back to close the oil market out at $84.92 on Friday, up just 5 cents from the prior week’s settlement.

The weekly inventory stats put out by the Dept. of Energy last week showed crude supplies rising 1.98 million barrels to 356.2 million vs. analysts expectations of a 1.35 million barrel gain. Imports gained 5.5% to 9.56 million barrels, the most since September.

Refineries increased nearly 2% to 84.5% of capacity, the highest rate since October. Gasoline inventories dropped 2.5 million barrels while distillate supplies increased 1.1 million barrels versus an expected draw of 1.5 million barrls.

Even as crude supplies gained for a 10th consecutive week, the market remains focused on an optimistic outlook of a recovery from the worst recession since the 1930’s. Continued confidence in a recovery is the key to sustaining rallies in the crude oil market in the week’s to come. If this confidence begins to fade, a severe correction will likely follow.

Technical Outlook:

The market started the week off in a minor daily downtrend channel which commenced after peaking at $87.00 Resistance last week and forming a key bearish “Evening Star Candle” pattern. Sellers have dominated the action Monday into Tuesday and took out the 1st Quarter high at $83.95 to challenge the longer term 11-week uptrend line at $82.50. Key weekly Support is placed at the 11-week trend at $82.50 to the 2010 breakout price at $82.00 from here with this range a solid area for shorts to take some profits. Heading into the middle of the week, the $82.50 to $82.00 Support range should play a key role in the market direction.

Upside: Containing price action above $82.00 from here generates attractive buying opportunity for the Bulls for moves back into the $84.00 to $85.00 range where longs can scale out of profits. Successive settlements above $84.00 and $85.00 will restore Bullish momentum into the latter half of the week. Stable price action above the $85.00 level will garner strength and generate rallies back to the top of a 3-quarter uptrend channel at $86.00 up to the current 2010 high at $87.09.

Closing out the week above $85.00 keeps the Bulls in control while a breakout above $87.09 sets sights on $88.00 to $90.00 in the foreseeable future. $90.00 crude oil marks a 50% retracement of the 2008 major Bear sell off, therefore expect to solid profit taking from long term Bulls.

Downside: Weekly Resistance is seen at $84.00 to $85.00. Sellers can take a scale in approach into the $84.00 to $85.00 range. After attaining this range, failures to settle above $84.00 puts the Bears in good position for another sell off to retest the 11-week uptrend line to the 2010 breakout at $82.50 to $82.00 key weekly Support range. Settlements below $82.00 indicates weakness and opens the flood gates to a washout Bear flush targeting the $80.00 benchmark price. Most shorts should cover against $80.00 as the Bulls will likely be looking to defend that level the first time down. A settlement below $80.00 is extremely bearish on trade in the upcoming week.

Benzinga Recommends that you take a look at the United States Oil Fund (NYSE: USO). The USO is the ETF that tracks crude oil. The United States Oil Fund was up 2.13% in Wednesday's session.