Crude futures are recovering from an earlier retest of the psychological $65/bbl level as a flurry of M&A activity sends the S&P futures back past 1050. A bounce in crude was overdue considering the extent of the commodity's most recent pullback. However, we recognize relatively weak buy-side volume thus far today, indicating present strength in crude may not have much longevity. The increase in M&A activity, though a positive for equities, does not alter the state of current economic fundamentals. Friday's durable goods data was surprisingly negative and weekly inventories registered a considerable surplus. Therefore, crude's supply and demand side each took a hit last week. Investors will now look to tomorrow's CB Consumer Confidence data to get an idea of just how badly U.S. consumption is faring. Weak U.S. and British consumption data would only place an additional drag on the price of crude. Meanwhile we've witnessed a rapid appreciation of the Dollar against the Pound, making U.S. crude a less attractive import for Britain. However, the EUR/USD is holding up relatively well amidst present volatility in the FX markets, preventing crude from experiencing a more protracted decline.
Looking across the globe, Iran is making the headlines again. Since Iran is the world's 2nd largest supplier of crude, political tensions are causing some analysts to predict a pop in the price of crude. However, the situation in Iran is all smoke and no flames at this point, and we'll have to see how UN negotiations fare next week. Behavior of the Dollar and U.S. equities should continue to be the main driver of crude despite the psychological implications of Iran's actions today. Therefore, investors should keep their attention on the interaction of the EUR/USD and S&P futures and their respective technical levels. As for China, the Shanghai Composite Index (SCI) continues its brisk pullback. Chinese imports of crude, iron ore, and copper have decline for the last two months. Any further slowdown in China would spell bad news for crude's near to medium-term outlook.
Technically speaking, crude futures have made a greater commitment to their downtrend following last week's decline beneath previous September lows. Crude has ventured outside of its month long $68/bbl-$73/bbl trading range. As a result, crude potentially faces multiple downtrend lines and the highly psychological $70/bbl level. However, crude futures do have July lows and the highly psychological $60/bbl level should the situation continue to deteriorate. Furthermore, investors should consider the fact that OPEC would likely cut back on production if crude were to fall to uncomfortably low levels. Therefore, there is a longer-term psychological force at play. Overall, despite immediate-term strength, crude's technicals are turning negative and recent behavior in the FX markets is worrisome for crude. If economic fundamentals should continue to cool down this would likely place substantial near-term downward pressure on price before OPEC has the opportunity to act.
Resistances: $67.36/bbl, $67.64/bbl, $68.08/bbl, $68.60/bbl, $69.06/bbl
Supports: $67.07/bbl, $66.59/bbl, $66.11/bbl, $65.77/bbl, $65.45/bbl, $64.86/bbl
Psychological: $65/bbl, $70//bbl