25th November Oil and Gold overview
25th November 2009
Commodity Overview
Focus on Oil & Gold
Over the last five days we have seen oil continue to trade sideways; USD weakness and ongoing equity strength have provided support. Trading conditions have been subdued as the market appears to be preparing for a breakout.
Thoughts from the trading floor
Oil futures look technically bullish as they continue to form a bull flag,whilst holding above the previous consolidation zone. We are yet to see the support at $74.96 re-tested although a daily level looks to have been formed at $75.57. The flag formation is still in place and continues to form within the parameters of the daily downward trend line. This trend line has had several false breaks but Oil is yet to manufacture a close above, currently the break point is at $79.36. There is no guarantee that the bull flag formation will result in a break to the upside but the amount of pressure building up around these prices will probably produce an aggressive break at some stage.
Last night the American Petroleum Institute reported that US inventories rose 3347K barrels last week. This compares to the analysts estimate for the DOE number of a 1500K barrel build. It is worth noting that the DOE data is being release a day earlier than usual due to the Thanksgiving holiday. The API Gasoline showed a build of 1707K significantly higher than the estimates for the DOE number of 300K. The importance of the Gasoline number in recent times cannot be underestimated and with such a discrepancy it will be worth considering again.
We have seen Oil prices rally significantly this year boosted by an upturn in the equity markets and USD weakness, but are the fundamentals pointing to higher prices. This very mush depends on how sustained the recovery is; longer term players are pointing towards future demand from the developing world as the reason for high prices particularly in the distant months futures. This is only likely to materialise if the recovery does not stall, if a double dip does occur Oil prices will suffer but perhaps not to the same extent as equities. For this reason a long Oil play may provide better value right now than buying an equity index.
Bull View
Bulls will feel confident as long as Oil futures can hold above support at $74.96. In addition the Fed’s comments last night which appeared to support further USD weakening will provide the energy sector with further support.
Bear View
Bears remain very much on the back foot and will be desperate to prevent the daily bull flag from breaking. With so much data released today they will be looking for hints that the macro fundamentals do not support the current optimism.
Futex View
We believe that in light of comments out of the Fed last night the USD will continue to weaken in the short term supporting both equities and Oil. In the longer term a significant pull back in equity markets appears likely and this would undoubtedly have a drag on oil prices.
