This Oil Market update, which is concurrent with the latest Gold and Silver Market updates, comes soon after the last one and is necessitated by the "game changing" developments last week that sparked a broad reversal to the upside across markets. On Thursday night there was a breakthrough at the European summit which will result in more integration in Europe, with the main practical effect of this as far as the markets are concerned being the prospect of centralized intervention to support the bond markets. This should save the beleagured euro, at least temporarily, and thus drive the dollar lower. While this was certainly no "magic wand" that will make Europe's severe problems go away, it should buy time, and given the negative sentiment extremes arrived at prior to the summit, it should afford the space for a substantial recovery rally across the commodities markets to develop, especially in assets such as oil that are priced in dollars. Longer-term deflationary conditions are expected to prevail, despite desperate money pumping, and eventually the gargantuan derivatives timebomb should go off with incalculable consequences.
On the 6-month chart for Light Crude we can see that Thursday night's developments resulted in a massive near 8% jump in the oil price on Friday, leaving behind a clear, large "Bullish Engulfing Pattern" on the chart. This constituted a clear breakout from the downtrend - a move of this magnitude after a severe decline normally marking a reversal and the start of an uptrend. The Head-and-Shoulders top that we had earlier observed has been invalidated by yesterday's action, at least over an intermediate timeframe.
The oil COT charts are at their most bullish since last October, when a similar level preceded a really big 6-week rally. So now that the immediate crisis in Europe looks set to ease temporarily, it is reasonable to expect a substantial rally in oil from here against the background of a falling dollar.
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