On Wednesday, crude oil gained 1.35% and climbed to almost $103 per barrel after the U.S. Senate reached an agreement to increase the country's borrowing limit, easing concerns that a debt crisis would weigh on crude demand. Uncertainty about the government shutdown's effect on the broader economy, and more importantly, the potential for the U.S. government to miss debt payments sent crude oil to a narrow range in recent weeks.
The agreement was reached just a day before the deadline, which means that the U.S. will avoid a costly default on its debt and that lawmakers will be able to fully reopen the government. The Senate struck a deal to fund federal agencies at current spending levels through Jan. 15 and extend the country's debt ceiling through Feb. 7. A negotiating committee would be charged with devising plans for longer-term solutions.
On Wednesday, oil investors also monitored a second day of talks in Geneva between Iran and six world powers over the country's nuclear program. The two sides issued a statement saying the new government in Tehran had set out "an outline of a plan" to resolve the nuclear standoff. The statement described the plan as "an important contribution" that is "being carefully considered" by the six powers. Additionally, Iran will hold more high-level talks with six major powers on its nuclear program on Nov. 7-8. In spite of this positive news, it seems that it is too early to talk of a breakthrough.
Having discussed these two major factors which had an impact on crude oil, let’s move on to the technical changes in the crude oil market.
Quoting our previous Oil Trading Alert:
(…) we should keep in mind that in the previous days crude oil reached the long-term declining support/resistance line based on the September 2012 and March 2013 highs and almost reached the September 2012 top. Therefore, in spite of the current decline, these strong support levels may encourage oil bulls to act and slow further declines.
Yesterday, after a lower open crude oil slipped below the Tuesday low and dropped to $100.75 (an intraday low). However, oil bulls didn’t give up and we saw a pullback in the following hours, which took light crude to its intraday high of $102.97. With this upside move crude oil came back above the 38.2% Fibonacci retracement level and closed above it. In this way the breakdown below this important support was invalidated.
Looking at the daily chart, we see that in the recent days a consolidation has formed. Therefore, if the oil bulls manage to push the price of crude oil above $103, we may see an upward move to the upper border of the trend channel (currently slightly below $105).
Summing up, light crude remains above an important long-term and medium-term support, which may have a positive impact on the very short-term picture in the coming days. Additionally, the breakdown below the 38.2% Fibonacci retracement level was invalidated, which is a bullish sign. However, it’s not strong enough to improve the very short-term outlook at the moment.
Very short-term outlook: mixed with bullish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish
Trading position (short-term): We do not suggest opening long positions yet. We will keep you – Oil Trading Alerts subscribers - informed should anything change, or should we see a confirmation/invalidation of the above.
In the past, we have seen both positive and negative divergences between the WTI and XOI many times. However, taking into account the relationship between light crude and the oil stock index in the previous weeks, we can conclude that the oil stocks have been outperforming oil since our first Oil Investment Update was published. Therefore, those of you who plan to take long positions in the crude oil sector might want to consider choosing oil stocks instead of crude oil itself as it seems they have greater upside potential at this moment. At this point, it’s worth noting that yesterday the XOI broke above the May top, which is a strong bullish sign. Although the breakout is not confirmed, it seems that we are likely to see further growth to at least the upper line of the rising wedge (currently close to 1,450).
Please note that in this area are two very important Fibonacci retracement levels:
76.4% (around 1,447) and 78.6% (close to 1,467) – both based on the entire May-October 2008 decline. Additionally, this resistance zone is reinforced by the 100% Fibonacci price projections (at 1,454) based on the weekly chart. In this case, we take into account three data points: the Oct. 3, 2011 low, Feb. 27, 2012 top and Jun. 4, 2012 low. Therefore, further increases may be restrained by this strong resistance zone. However, if the buyers don’t give up and manage to push the oil index above this resistance, the next target level will be around 1,560.
Thank you,
Nadia Simmons
