Thursday, June 23, 2011

Thursday Oil Market Analysis

Last week, I noted that oil finally moved through the 96/98 price level, which had been providing major support for a few weeks. This move signaled a shorting opportunity. However, underlying the oil market is this change in the underlying fundamentals:

This is something I've been talking about for some time: increased demand from the developing world is providing a floor for oil prices. That being said, let's take a look at the charts:

Oil prices have clearly moved through technical support and are now resting in the 92-94 price area. All the EMAs are moving lower and the shorter EMAs are below the longer EMAs. Prices are using the EMAs for technical resistance, another bear market characteristic. Momentum is weak. But most importantly, prices are below the 200 day EMA, the line delineating the difference between a bull and bear market.

On the 5-minute chart, the 95/95.5 are is providing upside resistance. This was the lower boundary of previous support. The 93 area is providing short-term support. However, the primary trend from last week is one of sideways consolidation.

The oil market is caught between two different issues. In the short-term, there is concern about the pace of expansion. Lower growth = lower oil demand = lower prices. However, as I pointed out above, there has been a strong, fundamental, long-term shift in the world's oil demand as countries like India and China have grown with their demand has supplementing US/EU demand, providing a long-term floor under prices. But currently, these countries are also tying to slow growth due to increased inflationary pressures within their respective countries. In other words, there is currently a great deal of negative sentiment weighing down oil prices.