Thursday, August 27, 2015

Let’s Talk Oil

The rolling first crude oil future contract trades to a new  four day high this morning and is testing a bearish downward sloping trend line.  There appears room for some additional gains. 

On Monday, crude plunged below a lower bound of a channel trend line support dating to early-July.  That rather well defined channel trend collected price action during most of its $16 plunge.  I say most of that plunge because the low on Monday broke below the trend line support while it created a 13th new session low without a three session pause.  This is one way I gauge oversold conditions.  Oil was indicating, both with the number of new lows and with the bearish momentum spike, that it was indeed stretched and at risk of a bounce.

On Tuesday, the crude contract recovered to trade higher and settle higher than the ‘mid’ of Monday, removing the bearish implications of that session. 

Now the contract is threatening the upward trend line from the channel and would best that channel top at $41.70 today.   Clearly a settle above that trend line would signal positive technical conditions for crude.  The trend descends at a rate of roughly 40 cents per day, so if the upper channel is not broken today, the hurdle rate is as low as $41.30 tomorrow. 

To sum, there has been a lot of commodity bashing lately.  Fear that China was imploding and global demand was dramatically shrinking in the face of oversupply with Iran coming back on line and extreme overcapacity in the ‘fracking’ regions, has pressured oil prices below levels that can be sustained without additional supply coming online or further reduced demand.  Today’s Q2 GDP report that was better than expected at 3.7% demonstrates better than anywhere else that the U.S. economy is not dead.  The Fed continues to near a policy rate change, re-accelerated with the GDP report and the quieting of global equity market turmoil over the last 48 hours.  For now, it is easier to imagine the ‘next surprise’ being toward greater growth potential and greater inflation prospects than the converse. 

Crude oil should react correspondingly.     

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