Crude futures have recovered from intraday lows inflicted by worse than expected U.S. employment data. Rising unemployment and declining consumption should take its toll on demand for crude. Additionally weekly inventories registered a sizable surplus for the second week in a row. Despite the negative supply and demand fundamentals crude continues to prove resilient. In fact, yesterday crude showed a muted reaction to negative data compared to the large pullback in U.S. equities. Today crude is being buoyed by the positive performance of the EUR/USD in the face of another weak session in U.S. equities. Therefore, crude futures continue to carve their own path in the midst of volatile performances of both the Dollar and U.S. equities. The stability of crude is mysterious and we can only speculate as to the reasons behind recent resilience. Tension surrounding Iran's nuclear program could be buoying the price of crude. However, Iran made concessions and appears to be playing ball, so this line of reasoning doesn't carry much weight. Another possibility is that the regulation curbing trading of commodity futures could be lowering volatility. Lastly, investors may be reluctant to send crude out of its trading range due to the fear that OPEC will manipulate production to keep crude within its desired $68-$73/bbl trading range. We believe the last reason may be the more prominent driving force behind crude's resilience, yet we are merely speculating.
Regardless of the reasoning, crude has climbed back above our 2nd tier uptrend line and is trading back around the psychological $70/bbl level. Crude futures registered large buy-side volume on Wednesday's up-bar, indicating investors are standing behind crude's recent step higher. However, the futures are still stuck beneath our 3rd tier downtrend line and multiple September highs, not to mention the psychological $75/bbl level. Therefore, gains should be limited to the topside as long as these technical barriers are in place. As for the downside, crude futures above our 1st and 2nd tier uptrend lines along with previous September lows and the psychological $65/bbl level. Due to the wedge taking place and the inconsistency of crude's behavior with its correlations, we have a neutral outlook trend-wise on crude. Crude's fate will ultimately rest on the S&P's ability to bottom and the Dollar's behavior over the near-term. Any wave of massive Dollar appreciation coupled with an exacerbated downturn in U.S. equities would likely drag crude futures lower, and vice versa. Since we are presently negative on the EUR/USD, GBP/USD, and S&P trend-wise, we are tempted to have a negative outlook on crude. However, we will stay in neutral as long as crude bounces around in its present wedge.
Resistances: $70.01/bbl, $70.36/bbl, $70.73/bbl, $71.13/bbl, $71.38/bbl, $71.78/bbl
Supports: $69.34/bbl, $68.97/bbl, $68.48/bbl, $68.08/bbl, $67.53/bbl
Psychological: $70//bbl, $65/bbl, $75/bbl