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Why 77.82 is a Key Level for Oil

Andrei Pehar from fxKnight.com at 01/18/10


This past Tuesday, January 12, the People’s Bank of China raised the amount of deposits that banks must hold in reserve by 0.5%.  China has a growing economy with a mounting demand for oil.  This indicates that China might have decided to try and force a slower rate of economic growth, reducing the demand for oil after making promises at the Copenhagen climate summit.

Then, on the following day, the news out of the United States was that crude oil inventories were far above the estimates of the financial pundits.  An expected 1.2 million barrels of reserve were usurped by the real figure of 3.7 million – over three times higher than expected.

Naturally, the price of oil fell on the news, and continued to drop in the days that followed – finally coming to a rest on Friday at 77.82 support.

Although there has been a push by several countries to change the base currency of crude to something other than the U.S. Dollar, for now the Dollar is still the legal tender with which the price of crude oil is measured.  Because of this, and the fact that the price of the Dollar has been down, traders and investors who retain other currencies were able to buy crude at a lower price.

So far, the Dollar has maintained a fair amount of stability in the new year.  If it holds this level or strengthens in the weeks ahead, then that will add to the  downside pressure on oil.  If, on the other hand, the Dollar resumes dropping like it did late last year, we can expect foreign buyers to once again resume stocking up on oil while it is “on sale”.

All of this makes what happens next at this key 77.82 level all that much more critical.

If the week opens above this level and it continues to hold as support in the days ahead, then we may see price push off of it and rally up as high as 91.50

If, on the other hand, we break below this level and re-test from underneath as resistance, then I will be looking for a return back to 69.37 initially, with potentially a secondary target at 64.14 if the first fails to hold as support.

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