Crude Oil Vulnerable to Huge Supply, Stronger Dollar

This guest article was written by James Hyerczyk, financial analyst at FX Empire.

July crude oil prices could feel pressure this week if traders return to following the traditional fundamentals. Although legitimate concerns over supply outages underpinned prices last week, the main concern for traders should be the huge global supply and the strengthening U.S. dollar.

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Once the speculators are chased out of the market because of improving conditions in Nigeria, traders will be forced to deal with the growing supply and the possibility of slower demand. This should lead to the start of a near-term correction.

The dollar rallied this week to its highest level since March 29 as growing expectations that the U.S. Federal Reserve may raise rates next month prompted money managers and fund investors to cash out of long positions.

After reaching its highest level for the year, crude oil tumbled following the release of the Fed’s April policy meeting minutes that fed expectations of a June rate hike. On Thursday, New York Fed President William Dudley said that the central bank was on track for a June or July rate hike.

Sellers came in on the news because of uncertainty, which tends to encourage investors to book profits until the dust settles. At this time, the fear is that the stronger dollar will curtail demand from foreign traders because crude oil is a dollar-denominated commodity.

If the dollar continues to rise then crude oil prices will have to be adjusted to meet this change in the fundamentals. This could lead to the formation of a short-term top and a meaningful correction, but not a necessarily a change in trend. Traders should start to prepare for a change in the fundamentals especially since price and time suggest that the market is in a good position to top out.

Technically, the main trend is up according to the weekly chart. The market is no danger of changing the main trend to down, but we could see a loss in upside momentum if longs decide to take profits or if aggressive sellers decide to refresh short positions.

The main range is $64.00 to $31.61. Its retracement zone is $47.79 to $51.63. This zone essentially stopped the rally last week at $49.56. This is normal behavior because long traders typically take profits inside retracement zones.

Based on Friday’s close at $48.41, the direction of the market this week will likely be determined by trader reaction to the main 50% level at $47.79.

A sustained move under $47.79 will signal the presence of sellers. This could lead to an acceleration to the downside because the next support target doesn’t come in until $44.50.

The new short-term range is $37.50 to $49.56. Its retracement zone at $43.53 to $42.11 is the primary downside target, should there be a normal 50% - 61.8% correction.

A sustained move over $47.79 will indicate the presence of buyers. This could create enough upside momentum to challenge a major long-term uptrending angle at $49.61.

Overtaking $49.61 will indicate that stronger buyers have returned. They will have their sights set on targets at $51.50 and $51.63.

Watch the price action and read the order flow at $47.79 all week. Trader reaction to this level will tell us if the bulls are in control or if the bears are taking over.