Thursday, August 4, 2011

Thursday Oil Market Analysis

Last week, I wrote the following about the oil market:
Yesterday, all speculative commodities took a hit as the markets started to seriously consider the possibility of a US default. Right now, this trumps the overall supply and demand situation. Should a default occur, expect prices to move lower, as a default will slow economic growth and thereby lower overall demand. However, if a default is avoided, expect the upward trajectory to continue.
For the last month, my central thesis for the oil market was it would continue to move higher based on the increase in Asian demand and the U.S.' "summer driving season." Even though Asia is slowing, it is still growing at high rates, increasing demand.

This thesis ran into two problems last week. The US printed a very weak GDP report with sharp downward revisions to the first quarter GDP. The US debt deal will decrease US growth over the next few quarters, lowering overall demand (more on this later today). As such, oil moved sharply lower last week. Let's look at the charts:

On the 5 minute chart, prices are clearly moving lower. They have continually broken through support to move to new lows and are now in a downard sloping channel.

The daily chart shows the action in sharp detail. After getting just above the 50 day EMA, prices broke their upward trend line and moved sharply lower. Now prices are below all the EMAs (especially the 200 day EMA) and all the shorter EMAs are moving lower. The MACD has also given a sell signal.

The next key level of support is 90/bbl. Should prices move lower, we'll have to go back on the chart to fine support and resistance.