On Monday, crude oil lost 1.35% and dropped to a new monthly low of $99.41. Light crude declines below $100 for the first time since July after the EIA data showed that U.S. crude stockpiles grew more than expected in the week to Oct. 11.

U.S. crude oil inventories rose by 4 million barrels to 374.5 million, well above an increase of 2.2 million forecast in a Reuters poll of analysts. Oil inventories at Cushing, Oklahoma, the delivery hub for the U.S. oil benchmark, rose by 366,000 barrels to 32.99 million as pipeline bottlenecks eased, after shedding 17 million barrels since June 28.

Just like a week ago, we clearly see that yesterday's build put a lot of pressure on the oil market and that surplus definitely weighed on prices. Taking the above into account, we can conclude that there are a lot of stocks of crude oil in the U.S. Therefore, fundamentally, the oil market is not so strong, but technically WTI could rebound today if the employment data is better than expected.

The U.S. jobs data for September was delayed from Oct. 4 by a partial U.S. government shutdown caused by wrangling in Washington over fiscal matters including the debt ceiling. Please note that analysts polled by Reuters expect nonfarm payrolls to have increased by 180,000 in September after a rise of 169,000 jobs in August, with the jobless rate steady at 7.3 percent. Therefore, a reading anywhere in the 160,000 to 190,000 range would probably be fairly neutral with respect to near-term U.S. dollar direction. Any signs of weakness may reinforce expectations that the Fed would hold off from scaling back its stimulus this year, pressuring the greenback. However, if it is a strong number it would suggest that the shutdown may have had only a limited impact and any strength in the jobs data could be used as an excuse to buy the dollar.

Please note that although there are short periods of time when the price of light crude is supported by a weaker dollar, overall, they have been positively correlated in the recent months. If this relationship remains in place and we see a rebound in the greenback, we will likely see a pullback in crude oil in the following days as well.

Having discussed the above, let’s move on to the technical changes in the crude oil market.

Quoting our  previous Oil Trading Alert:

(…) Light crude remains below the 38.2% Fibonacci retracement level and the breakdown is confirmed, therefore another attempt to test the psychological barrier of $ 100 should not surprise us. (...)If the oil bears manage to push the price below $100, we will likely see further declines to the lower border of the trend channel (currently slightly above $99), which intersects with the 50% Fibonacci retracement level and the June high.

Yesterday, oil bears showed their claws and pushed the price of crude oil below this important support level for the first time since June. With this downward move light crude declined to its new monthly low of $99.41. Looking at the daily chart of crude oil, we see that there is no much room for further declines. The strong support zone may encourage oil bulls to act and result in a pullback. In this case, the first target for buyers will be around $102 per barrel. However, if the sellers manage to break below the lower border of the declining trend channel, we may see further deterioration and the first target for sellers will be around $96 per barrel.

Before we summarize, we want to focus on the XOI once again.

Quoting our previous Oil Trading Alert:

(…) on Friday we saw a third consecutive close above the May top, which means that the breakout is confirmed. With this upward move the oil stock index reached a strong resistance zone.

On Monday, oil stocks climbed once again and hit their new monthly high at 1,463. In this way, the XOI almost reached the 78.6% (close to 1,467) Fibonacci retracement level based on the entire May-October 2008 decline. Therefore, further increases may be decelerated.

However, if the buyers don’t give up and manage to push the oil stock index above this resistance, the next target level will be around 1,560

Summing up, light crude dropped below $100 and almost reached the strong support zone. If this area encourages oil bulls, we may see a pullback to around $102. However, if the sellers break below $98, further declines should not surprise us.

Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: bullish

Trading position (short-term): We do not suggest opening short positions yet. If we see a breakdown below the lower border of the declining trend channel (based on the Sept. 3 and Sept. 30 lows), we will consider opening speculative short positions.

Thank you.

Nadia Simmons
Sunshine Profits' Crude Oil Expert
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