Fundamentals

Crude Oil futures have suffered losses recently, due to demand concerns and stockpiling in the US. The slowing economic recovery has caused many market observers to cut their demand outlook for the foreseeable future. The question of whether the US and global economies are heading for a double-dip recession remains unanswered at the moment. While the recovery has really lost quite a bit of steam recently, there are no signs that the economy will be contracting. This could limit the downside potential of the Crude Oil market in the near-term. The US supply of petroleum has been on the incline lately, which could be troublesome for Oil bulls with Labor Day just around the corner, marking the unofficial end of the driving season. The buildup of supplies heading into what has historically been the low demand stretch of the year may limit the upside potential for the Oil market. This could result in range-bound trading for the Crude Oil market.

Technical Notes

Turning to the chart, we see the price of October Crude Oil dropping from 82.50 to the low 70's very quickly, resulting in oversold conditions on the RSI indicator. The next area of minor support for the October contract comes in at 71.20, with more significant support coming in at 68.75. The combination of oversold conditions and chart support could result in the market finding some traction. Also, the momentum indicator is showing bullish divergence from both price and RSI, hinting at the possibility of a near-term bounce. Failure to hold support at 68.75 could be seen as a significant breakdown for the Oil Market.

Trading Ideas

The fundamental outlook for the Crude Oil market has become bleaker due to the worsening economic conditions. However, the consensus opinion seems to favor slow growth rather than a double-dip recession, which may prevent a freefall in prices. The chart shows oversold conditions, which could trigger short-covering and attract some short-term buyers. Traders looking for a near-term bounce in prices may wish to go long an October Mini Crude Oil futures contract at 71.50 or better, with an upside objective of 77.00 and a stop at 68.50. The trade risks roughly $1,500 for a potential gain of $2,750.

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