On Friday, crude oil (NYMEX:CLN14) extended gains and hit a fresh nine-month high, supported by the deteriorating situation in Iraq. Thanks to these circumstances, light crude climbed to its next resistance zone. Will oil bulls be strong enough to break it in the near future?
On Friday, crude oil rallied for a second session as Sunni militants continued their advance toward Baghdad, which fueled concerns that Iraq's ample oil production could be threatened. As we mentioned in our previous Oil Trading Alert, although most of Iraq's production is in the south of the country, far from the current violence, oil investors worry that the situation could quickly escalate and disrupt oil shipments.
As a reminder, Iraq produced 3.6 million barrels of oil a day - its highest level since before the invasion in 2003. According to the U.S. Energy Information Administration, Iraq was the seventh-largest oil producer in the world last year; therefore, military activity in a large oil producer was bullish for crude oil and pushed the price well above $107 per barrel.
Despite this improvement, light crude reversed after U.S. President Barack Obama said he won't sent troops to Iraq while the country is still exporting crude oil. Additionally, soft U.S. economic data pushed the price down as well. On Friday, official data showed that U.S. producer price inflation fell 0.2% in May, beating expectations for a 0.1% rise.
Core producer price inflation (without food, energy and trade) slipped 0.1% last month, compared to expectations of 0.1% gain. On top of that, a preliminary report showed that the Thomson Reuters/University of Michigan consumer sentiment index fell to 81.2 this month from 81.9 in May, while analysts had expected the index to rise to 83.0 in June.
Can crude oil move higher without disturbing news from Iraq? Let’s check the technical picture (charts courtesy of http://stockcharts.com).
From this perspective, we see that crude oil almost touched the long-term declining line without breaking it. Therefore, what we wrote in our previous Oil Trading Alert is up-to-date:
(…) this important line is currently around $107.76 and reinforces the resistance zone (…) the CCI is overbought, while the Stochastic Oscillator approached the level of 80 (…). Connecting the dots, it seems that as long as there is no breakout above this key price level, another sizable move is not likely to be seen.