In our 30Sep13 post “Petroleum Complex Poised for a Move”, we identified the $98.25 support as critical for crude oil. Quoting directly from that post:
“Crude Oil has broken above the downtrend initiated by its all-time 2008 high. Critical points of support in order to maintain the up-trend are the $98.25 level (test of the Sep12 (correction – s/b Feb13) intermediate high) and the low $90′s (test of the long running downtrend). Failure to hold these levels of support would suggest another hard down leg for Crude Oil.”
Critical support now lies in the $92-94 range (test of the long running downtrend) and in the $84-85 range (the intersection of the Nov12 low and the uptrend line reflecting the lower bound of the 2 1/2 year consolidation range). The following chart offers a closer view of the support levels.
A look at the Commitment of Traders (COT) data suggests a washout is necessary to re-balance the positioning of the commercial vs. speculative players. The COT data is graphed in the bottom pane of the above charts. The commercials (bold line) are holding net short positions while the speculative players (medium dash line) are holding a nearly equal net long position.
Most importantly, the relative size of these net long vs. net short positions reached the largest level in the history of the futures contract during Jul13. IMHO, this position imbalance must be reconciled, relieved, exfoliated before a crude oil bull market can resume. The key question becomes – At what price point do the commercials cover their short positions?