By James Hyerczyk
Commodity Training Advisor

Optimism that the recently passed bailout of Greece will lead to increased demand and ease the uncertainty in the European economy is one of the factors driving up crude oil this week. The agreement which gave Greece EUR 130 billion ended months of uncertainty that helped hem crude oil into a tight $10 range.

While no one is certain if it will mean the Euro Zone has avoided an economic slow down, traders seem to be pinning their hopes on the possibility of increased demand. This along with tensions between Iran and Europe is combining to underpin the crude oil market and drive it to price levels not seen since mid-November.

The inability to penetrate a major 50 percent price level at $95.13 last week helped form a new bottom at $95.81 on the April Crude Oil weekly chart. With two main bottoms in place at $93.27 and $95.13, momentum shifted to the upside, triggering a slight breakout above a pair of main tops at $103.08 and $104.10. This trading action reaffirmed the uptrend and set up the market for this week’s breakout to the upside. Further chart analysis suggests that $108.84 is the next likely upside target.

While the focus is on the upside this week, traders should note that $100 .00 is new support, followed by a 61.8% price level at $99.60. Since this market has had a rapid run-up, daily traders are cautioned to lookout for a closing price reversal top pattern to signal a temporary top.

As the world was watching the on-going negotiations between the European finance ministers and Greece officials, crude oil prices were surging after Iran reportedly warned that it would cut oil exports to six European countries including the Netherlands, Spain, Italy, France, Greece and Portugal, unless European companies agree to strike long-term agreements and guarantee their payments. The move by Iran appears to be retaliation for the European Union’s foreign ministers approval of sanction against Iran on January 23. The sanctions included a ban on Iranian oil imports and a freeze on assets.

The threatened action by Iran couldn’t have come at a worse time as many of the countries targeted are struggling financially due to the debt crisis and severe austerity measures. It now appears that the EU’s plan to punish Iran for its alleged production of military grade uranium may have backfired.

The EU’s original plan called for it to impose sanctions on Iran, but to have Saudi Arabia and other OPEC allies increase production to cover the shortfall. This plan has backfired because now Iran appears to be calling the shots. Saudi Arabia may be increasing production, but political unrest in several key Middle Eastern nations means that demand is likely to outstrip this extra production.

When the U.S. and the EU decided to impose sanctions on Iran, they were both counting on the rest of the oil producing world to cover any production shortages. This part of the plan is pretty clear. They were also assuming that oil traders would understand the rational behind the plan. Unfortunately, they were not counting on a possible panic in the oil markets.

If the plan had unfolded as expected, it was anticipated that oil prices would have remained relatively steady, but instead traders shifted their focus on the possibility that supplies would be disrupted. This created uncertainty in the market making traders nervous about further supply interruptions. Until the world markets can adjust to the change in supply, a nervous tone will dominate the price action.

Worries about disruptions in supply tend to cause buyers to overpay, creating volatile price swings. Prices are expected to continue to surge as long as buyers are willing to chase the market higher and nervous shorts are willing to pay anything to cover their positions. With last week’s action highlighting both of these events, one has to conclude that traders are panicking and that higher prices will follow.

There is one caveat about this current rally that traders have to be aware of:  this move is being driven by political maneuvers and not by true supply and demand fundamentals. Traders are pricing crude oil as if there is an actual shortage in the world market and so far this hasn’t been the case.

Keep in mind that traders are nervous about the “erosion” of spare capacity. Until this actually begins to show up in the global demand numbers, it’s all speculation. This means that in order to fuel the rally, the political posturing and saber-rattling must continue or speculators will lose interest and begin taking profits.

Last week ended with the global energy markets worried about potential supply problems. This week began with the possibility of increased demand. The two events should help to maintain the bullish tone in the market. Technically, crude oil is not expected to see any resistance until $108.84 to $110.00. Unless there is a serious attempt to break this market back below $100.00, traders should continue to look for strong upside momentum.

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