Crude oil has had quite a run recently, crossed above $75 a barrel to an 11-month high last week. However, on Monday, July 23, the market saw a pullback, and the NYMEX September front-month futures contract finished 90 cents lower at $74.89. Given the market’s strong recent advance, many market participants have been looking for a correction. From a technical standpoint, momentum indicators are looking overbought and signaling a downturn may be possible; the relative strength index is hovering close to 77.

Cited as a factor in today’s downturn was a statement from OPEC that it is concerned about the impact of higher prices on the world economy. OPEC’s head of research, Hasan Qabazard, said a range of $60 – $65 was seen as a respectable price for crude. Although he said there was no reason to increase output when OPEC meets in September, market participants paid attention to that price range, and speculated about the possibility for production increases. So far, we haven’t seen much evidence energy prices have significantly impacted global economic growth. We have seen some news out of China that their economy may slow slightly, but they are still increasing their oil imports.

I see this recent pullback in crude oil as short-lived. We’ve had no hurricane worries thus far, and the geopolitical situation has quieted a bit. If we do get threatening news out of Nigeria or the Middle East, or if a major storm develops that could impact Gulf refining operations, the market could spike higher. So be careful if you trade, this market can be volatile.

Supporting a longer-term bullish trend, demand in 2008 is seen increasing significantly. We’ve seen forecasts of $95 - $100 a barrel in crude from respected analysts, and those types of prices are now viewed as coming earlier than thought, in 2008. I’ve even seen a wildcard forecast for $200, but that seems pretty extreme. If U.S. troops pull out from Iraq, that could bring $100 a barrel, as there is likely to be interim instability, and the market hates uncertainty.

Looking at options activity, options priced in the $100 strikes have seen increased volume and open interest, so those investors seem to agree prices are headed up.

Buy Crude Oil Futures, but Watch Technicals

I would recommend buying September futures at $74.50, and put a stop at $73.50. If support at $73.50 gives way, we could see a more bearish trend, and $69 could be the next downside target. If that’s the case, I’d reverse the trade and get short at $73.50 with $69 in mind.

If the market regains steam, $76.20 is resistance that needs to be taken out for another leg higher, to $76.70. But before we get there, I do see a further pullback first.

If you are trading the energy futures, weekly inventory numbers from the Energy Information Administration are important to watch. Analysts are anticipating a fall in crude oil inventories will be seen in the data Wednesday, July 25, as more refineries have come back on line.

See how Wednesday’s inventory data shakes out and go from there.

Greg Milkovich is a Senior Market Strategist with Lind Plus. He can be reached at 866-631-6216 or via email at gmilkovich@lind-waldock.com.

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