Commodities – Energy 

Crude Oil Falls on China Rate Hike Fears 

Crude Oil (WTI) - $89.73 // $0.87 // 0.98% 

Commentary: WTI fell $2, or 2.2% to settle at $88.86 and Brent fell $1.58, or 1.61%, to settle at $96.58 on Thursday. The theme for the day was China rate hike fears after GDP figures for the fourth quarter came out better than expected. The Chinese economy grew 9.8% in the quarter, much better than the 9.4% expected. 

Obviously, all else equal, a robust Chinese economy is a bullish factor for commodities, including crude oil. But at the same time, the data indicates that the People’s Bank of China may raise rates sooner rather than later in an effort to cool the economy and bring down inflation. Speaking of inflation, China’s Consumer Price Index for December rose by 4.6% year-over-year, matching expectations, but down from the 5.1% growth in the prior month. 

The DOE report on U.S. inventories had little impact on the day’s trading. Crude oil stocks rose by 2.6 million barrels, gasoline stocks rose by 4.4 million barrels, distillate stocks rose by 1 million barrels, and total petroleum stocks rose by 2.4 million barrels. If we add back in the production that was lost from the temporary disruption in Alaska, crude oil inventories would have risen by 5.2 million barrels. Overall, the report was neutral.

Technical Outlook: Prices took out support at the bottom of a bearish Rising Wedge chart formation carved out from early November, opening the door for a decline to test the intersection of rising trend line and horizontal support at $87.33. The broken wedge bottom (now at $90.13) has been recast as near-term resistance.

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Gold Plunges Below Support

Gold - $1348.93 // $2.65 // 0.20%

Commentary: Gold fell through support on Thursday, plunging $23.65, or $1.73, to settle at $1346.28. An excerpt from our latest Gold – FOREX Correlations report: 

“…As for gold specifically, we saw a significant breakdown this week, with the metal finally breaking through support near $1360 after several attempts. As mentioned previously, interest rate expectations have been rising for many of the major central banks, spurred by hawkish commentary from certain policymakers and an uptick in inflation. Market expectations, as implied by overnight index swaps, suggest that the European Central Bank may raise rates three times over the next twelve months (75bps total). Expectations for the Bank of England are only slightly lower.

Meanwhile, gold ETF holdings have tumbled almost 1.6 million troy ounces since their recent peak, an indication of that investors are selling the metal. As investment demand has been the single most important driver of gold prices on the margin, the impact is significant. We can’t be sure whether the aforementioned increase in interest rate expectations is what is spurring this selling, but it is likely one of the many factors impacting trading. ”

Technical Outlook: Prices have taken out support at $1361.39, the intersection of a horizontal barrier and a rising trend line set from late October. Sellers now target the bottom of a falling channel carved out from January’s swing high, now at $1325.08.

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Silver - $27.58 // $0.08 // 0.27%

Commentary: Silver followed gold lower, settling at $27.50, $1.28, or 4.43% lower on the session.

The gold/silver ratio rose to 48.9, above the four-year low near 46 set late last year. (The gold/silver ratio measures the relative value/performance of the two precious metals. A higher ratio indicates gold outperformance, while a lower ratio indicates silver outperformance)

Technical Outlook: Prices followed a bearish Inverted Hammer candlestick below resistance at the top of a falling channel set from the swing high in December with a break through horizontal support at $28.19. From here, sellers initially target the channel bottom, now at $26.94. The $28.19 level has been recast as near-term resistance.

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