31st March Commodity Overview
Focus on Oil
WTI Oil futures have continued to trade sideways over the last five days. On Monday the market did show some signs of strength closing just under $2 up on the day. However it failed to break the current range and yesterday the market drifted off the previous day’s highs of $82.78 to close at $82.37.
Thoughts from the trading floor
From a technical perspective Oil continues to show little change only confirming with every passing day the hold the current $78-84 range has over the market. The daily triple top formation is still in the frame and will continue to be until a break of $83.95 is achieved. That considered at current prices the bears have the upper hand in the short term, as the next move will most likely be a shift towards the bottom of the range. We could potentially see a retest of $77.90 over the next few weeks, and a break of here would cause some acceleration in the down move to the $70 area, where further substantial support exists.
Last night the American Petroleum Institute reported that US oil inventories rose 421K barrels last week. This compares to the analysts estimate for the DOE number of a 2500K barrel rise. The API Gasoline showed a draw of 946K opposed to the estimates for the DOE number of a 1850K draw. Last week demonstrated the strength of the API’s correlation to the DOE numbers, as they correctly predicted an exceptionally large build in crude oil. This week appears far less spectacular and as a result we expect to see a limited reaction to the DOE release this afternoon.
Commodity markets including oil are currently very exposed to the fortunes of the Chinese economy. Recent rhetoric out of China indicates that they are concerned of a bubble type scenario and are willing to use monetary policy to see off this threat (we have already seen them raise the reserve ratio twice in recent weeks). If growth and inflation did become too hot and resulted in rapid monetary tightening a fast cooling in the economy would result. The upshot of this would be a large decrease in demand for commodities from one of the world’s largest consumers, a scenario which would obviously be very detrimental to oil prices.
Bull View
Bulls will be hoping that the payrolls number expected this Friday surprises to the upside beyond already strong expectations, boosting hopes of a fast recovery. This could give them the opportunity to break resistance at $83.95 and test recently untraded prices.
Bear View
Bears will be satisfied that, despite strong equity performance prices, are trading sideways hinting that at the moment the market has no wish to trade higher. The recent shift towards USD again will give them confidence that oil can at least fall towards the bottom of its range over the next few weeks ($78).
Futex View
Oil continues to be trapped in a tight range in the short term between $78-84, though over a broader time horizon this range extends down to $70. We believe unless we see something exceptional in the jobs report on Friday this range will continue to hold. We expect the next move will see oil drift back towards the bottom of the range (around $78) lead by a faltering equity rally and some further USD strength.
