A Rally in Crude Oil Would Not Be a Surprise

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...Some investors argue that the supply/demand situation favors higher oil prices. I also agree with this thesis, but as long as fear and perception of an economic recession prevail over the IEA’s prediction of long-term oil prices, energy prices will remain under pressure...

On October 24th, I posted a report which noted that crude oil had broken through its 200 day moving average and was likely headed to test its January 2007 lows at $50 per barrel. Wednesday, oil closed at $56.16 to reflect a -13% decline since posting the above mentioned report.

Chart analysis of a 3 day timeframe indicates a high probability of testing support at $49.90. However, caution should be heeded as the rate of oil’s decline is rapidly decelerating and stochastics are extremely oversold. A rally in crude oil would not be a surprise as shorts may be inclined to cover near a fairly solid level of support. In further reference to the 3 day timeframe, support 1 is at 53.03, support 2 is at 49.89, pivot is at 59.29, while resistance 1 is at 62.43 and resistance 2 is at 68.69.

A flight to the safety of a secularly oversold U.S. dollar and concerns of a global recession have led to depressed energy prices. Some investors argue that the supply/demand situation favors higher oil prices. I also agree with this thesis, but as long as fear and perception of an economic recession prevail over the IEA’s prediction of long-term oil prices, energy prices will remain under pressure. The IEA asserts that world energy demand will rise on average 1.6% annually between 2006 and 2030 and attributes this to long overdue investment in energy infrastructure estimated to cost $26.3 trillion through 2030. To make matters worse, the current credit crisis is delaying some of these badly needed projects from coming online...If oil is able to maintain support at $50, odds favor a bullish retracement. Should oil fail to hold support, then it could potentially test its next support levels between $43 and $40...

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