Talking Points

  •  Crude Oil Likely to Track Stocks as Spotlight Turns to EU Summit
  •  Gold Prices Treading Water as Risk Appetite Trends Seek Direction

WTI Crude Oil (NY Close): $100.49 // -0.79 // -0.78%

Crude prices edged lower yesterday after the US Department of Energy reported that inventories unexpectedly rose by 1.33 million barrels last week, trumping expectation for a 1.25 million decline. Distillate and gasoline inventories likewise topped forecasts.

Looking ahead, all eyes are on Europe as the spectrum of growth-sensitive assets turn their attention to the EU leaders' summit set to begin in Brussels. Traders are hopeful that the sit-down will finally unveil a coherent plan to contain the Eurozone debt crisis, boosting broad-based risk appetite and offering a lift to the WTI contract. Although the final outcome is not due until Friday, traders will pay keen attention to any commentary that emerges from the sidelines to gauge progress.

Early outlines of a deal envision policymakers establishing a framework for deeper fiscal integration that subsequently gives the European Central Bank the necessary cover to ramp up Eurozone sovereign bond purchases, reducing borrowing costs and giving high-debt countries the necessary cover to implement reforms without the threat of a default. Most critically, a truly positive outcome will require minimal changes to existing EU treaties - speeding along its implementation - and a detailed roadmap for fiscal union with clearly defined steps to assure member states maintain budgetary discipline.

On the technical front, prices put in a Dark Cloud Cover candlestick pattern below resistance at 103.35 following a retest of a rising channel bottom established from early October, hinting a move lower is ahead. Initial support lines up at the 100/barrel figure - a key psychological barrier - with a break below that exposing 94.56.

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Spot Gold (NY Close): $1741.80 // +13.60 // +0.79%

As with crude oil, the EU leaders' summit is in focus for gold prices through the end of the trading week. The metal has carved out a significant positive correlation with the S&P 500 - a proxy for market-wide sentiment trends - courtesy of the US Dollar's go-to safe haven status. When risk aversion sends capital out of shares and into the greenback, gold faces de-facto downward pressure given its denomination in terms of the benchmark currency. On balance, this means a broadly risk-positive outcome to the Brussels meeting is likely to boost gold prices as the Dollar weakens. Needless to say, the reverse is likewise the case.

Sizing up the technical landscape, prices continue to stall below resistance at 1746.08, the 14.6% Fibonacci extension. Near-term support remains at 1711.13, the 23.6% level, a boundary reinforced by a rising trend line underpinning price action since late September (now at 1689.65). A break below the latter hurdle exposes the 38.2% Fib at 1654.44.

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Spot Silver (NY Close): $32.52 // -0.25 // -0.75%

As with gold, silver is looking to the US Dollar as the transmission mechanism for broad-based risk sentiment trends, with the spotlight on the EU leaders' summit over the coming 24-48 hours. Prices remain capped by range resistance at 33.04, with support at a rising trend line set from late-September (now at 30.98). A break below initial support exposes the 30.00 figure. Alternatively, a push through resistance exposes 35.35.

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--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com