Crude Oil rallied on Friday following stronger than expected Chinese Industrial Production numbers, which grew 9.4% Y/Y for the month of July, higher than the expected 9.2% and 9.3% previous. This data came hot on the heels of US Energy Information Administration (EIA)’s forecast that believe that China would overtake US as the largest net oil importer by 2014 – pushing Oil prices higher and reverting the losses suffered on Wednesday following a lower implied demand of Crude Oil based on inventory data from Department of Energy (DOE).
However, 106.0 remained firmed, and despite bouncing off the newly formed Channel Top during the 1st few hours of trade, 106.0 remains stubborn. It seems that WTI Crude remains nicely offered above 106.0, most likely due to profit taking activities from trades playing the bullish corrective move. The large number of profit taking around current levels also suggest that traders do not see the likelihood of price pushing back higher, which affirms current mid-term bearish pressure. Stochastic readings also suggest the same, with readings showing a Bearish Cycle signal as they push below 80.0 just as price action looks likely to breach back into the rising Channel.
From a technical perspective, 105.0 will be the next available support especially if price hits Channel Support before US midday, where the round number support is likely to be the confluence with Channel Support. Any further delays would result in Channel Bottom clearing 106.0 and potentially nudge price above the key 106.0 level if we continue to trade around current levels in the next 24 hours or so.
Fundamentally, it is interesting to see Crude Oil rallying off China numbers as they have been notoriously “optimistic” leaning. Furthermore, even if EIA’s forecast proved to be correct, the fact of the matter is that China is currently undergoing immense slowdown. Hence EIA’s estimate actually hint of declining future demand, not increasing demand for crude even it is accurate. Perhaps a more pertinent question that we need to ask is this: is crude oil worth above 100.0 a barrel considering that we are far away from 2007 in terms of economic health? US unemployment remains sticky, while industrial output, exports, and other key metrics remained below their 2007 counterparts. The only metric that is actually close to or exceeded 2007 levels is consumer sentiment and other sentiment data. Therefore, we can safely conclude that current elevated prices is the result of bullish sentiment going ahead of fundamentals ( see Dow Jones Index and S&P 500 for a better idea of how “overbought” we are currently at).
That being said, there is a chance that fundamentals can catch up and prove early speculators right, but should fundamentals erode from here, we could be in for a huge sell-off as traders who have already priced in a full economic recovery would be sorely disappointed. Taking a look at Weekly Chart, where price appears to be peaking within the same region where previous peaks in 2011 and 2012 was seen, coupled with Stoch readings being in overbought territory and looking likely to pull lower, the levels suggest that a strong bearish pullback (if it happens) will be strong, with 80+ regions support the ultimate bearish target.
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