Friday, January 21, 2011

Inventories and Threats of Chinese Tightening Give Commodity Bears The Advantage

Crude oil inventories spiked for a 2nd consecutive week, while on hand crude dropped in 3 out of 5 PAD districts the big gains in the Gulf Coast region created the net gain. Gasoline demand even fell for a 3rd consecutive week as gasoline inventories also made considerable gains. And oil prices showed the effects on Thursday touching a two week low of $88.00. But it wasn't all about inventories, commodities in general took a beating as traders seem to put more into the concerns over Chinese attempts to reel in their inflation worries with new rounds of tightening.


In a great article from Phil Flynn he reminds us "The Chinese, to keep up this charade, will have to buy more and more commodities from the global market to keep it going. The more artificially cheap commodities they feed to their ravenous marketplace will only leave the country wanting more and more. This of course would lead to an eventual monster bubble that if popped could take China’s economy down. The market already realizes what the Chinese should do".


Are the crude oil bulls in trouble here? According to Petromatrix GmbH yesterday’s crude oil's drop put it’s five day rolling mean below the nine day for the first time since Jan. 4. The decline of a short term indicator of momentum before a longer term measure is described as a “dead cross” and may be a sign that prices may correct lower. Olivier Jakob of Switzerland based consultant Zug reported “Brent and WTI are now suffering from a negative cross-over of the five to nine day moving average, and bulls will need to close today above the five day".

All the woes of Brent and the WTI as OPEC is increasingly facing calls to boost oil production as crude prices in Asia and Africa surpass $100 a barrel for the first time in two years. Nigeria’s Bonny Light grade, from which traders gauge the cost of West African oil, rose to $100.12 a barrel on Jan. 17, passing $100 for the first time since October 2008, according to data compiled by Bloomberg.

Our regular readers know how we feel about Fridays. The closing price on Friday will always tell us what traders are feeling comfortable about leaving on the table. As we go to press markets indicate that yesterdays sell off was a bit over done as prices have touched 90.22 before pulling back. Better top off your coffee, here's our numbers for Fridays trading.....


Crude oil was higher due to short covering overnight as it consolidates some of Thursday's decline. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near term. Closes below the reaction low crossing at 88.45 would confirm that a short term top has been posted. If March renews this winter's rally, weekly resistance crossing at 93.87 is the next upside target. First resistance is this year's high crossing at 93.46. Second resistance is weekly resistance crossing at 93.87. First support is the reaction low crossing at 88.45. Second support is the reaction low crossing at 88.07. Crude oil pivot point for Friday morning is 90.10.


Natural gas was higher overnight and trading above the previous reaction high crossing at 4.707 thereby renewing the rally off December's low. Stochastics and the RSI are diverging but have turned bullish signaling that sideways to higher prices are possible near term. If February extends the rally off December's low, the 50% retracement level of the June-October decline crossing at 4.876 is the next upside target. Closes below the 20 day moving average crossing at 4.448 are needed to confirm that a short term top has been posted. First resistance is the overnight high crossing at 4.747. Second resistance is the 50% retracement level of the June-October decline crossing at 4.876. First support is the 10 day moving average crossing at 4.514. Second support is the 20 day moving average crossing at 4.448. Natural gas pivot point for Friday morning is 4.641.


Gold was lower overnight as it extends this month's decline. Stochastics and the RSI are becoming oversold but remain bearish signaling that sideways to lower prices are possible. If February extends this month's decline, the reaction low crossing at 1331.10 is the next downside target. Closes above the 20 day moving average crossing at 1382.20 are needed to confirm that a short term low has been posted. First resistance is the 10 day moving average crossing at 1368.80. Second resistance is the 20 day moving average crossing at 1382.20. First support is the overnight low crossing at 1340.20. Second support is the reaction low crossing at 1331.10. Gold Pivot point for Friday morning is 1353.30.


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