The crude oil market has been facing trouble on all fronts lately. Global production has boomed at the same time that global economic activity is declining. It’s a fundamental case of too much supply and not enough demand. Additionally, unrest in Ukraine, Iraq, Syria, and etcetera seem to have little impact as these stories migrate from the front page to the international section of the newspapers. Finally, the 10% rally in the US Dollar since July has also done its share.
Now, for the big U-turn, in spite of all of these macroeconomic factors pointing towards lower prices this piece is actually about the buy side. The recent sell-off of 5.5% since the beginning of Thanksgiving week may be overdone. Commercial traders have been strong buyers of crude under $90 per barrel. Their buying picked up once again as we fell below $80. In fact, total commercial buying since the July low, which was also when the Dollar started to rally, has been more than 220,000 contracts. This is the strongest commercial long hedger buying we’ve seen since June of last year. Not coincidentally, the market rallied 11.5% over the next five weeks following last year’s buying surge.
Yesterday’s market action was enough to bring the market back above my short-term momentum indicator. When we combine a reversal in the market’s short-term momentum along with positive commercial trader momentum, it triggers the buy signal on this crude oil futures chart. Yesterday’s climb back off the lows also provides us with a relevant swing low chart point at which we can place our protective sell stop. While we don’t expect this to be a huge rally or a long standing position, it can certainly be a positive trading opportunity given the volatility and size of the contract. First resistance is around $73.50. A test of this area would make for a nice short-term trade.