Oil Weakness May Intensify

by Ashraf Laidi
Nov 19, 2009 21:57 | 315 Comments

Earlier this week, Asian & European markets showed another failure to respond to Mondays 1.4% gains in US equity indices (Dow & S&P), further highlighting the unsustainability of the gains in indices, which had become increasingly dollar-driven (caused by prolonged USD weakness resulting from Fed officials failed attempts to support it) instead of improved economic figures. Indeed, the absence of further improvement in fundamentals (4-month lows in Oct industrial production, slowing core Oct retail sales and 6-month lows in Oct housing starts) underscores the role of USD weakness as the main driver to higher equities.

Yet, while the dollar index hit fresh 15-month lows on Monday at $74.68, oil failed to regain its interim resistance of $80.50 (not even mentioning the year high of $82). Such failure was especially prominent following the higher than expected decline in oil inventory drawdown.
Last weeks brief break below $76 underscores the emerging bearishness in the fuel, which suggests a swift renewal of fresh shorts to retest the 75.53, which is the 38% retracement of the rally from the 64.98 low to the 82.06 high. And should the pattern of previous down cycles repeat itself in oil, a steeper decline could be in the woks, likely calling up the 73 handle.

Oil Weakness May Intensify - OIL Nov 19 (Chart 1)


Oil's inability to preserve rallies in the face of USD
weakness reflects the lack of sustainability of speculative flows to elevate the fuel as real demand falters (shown by 2 consecutive weekly higher than expected builds in oil inventories). The chart below shows a downward drift in the Oil /EURUSD ratio, resulting from a more rapid appreciation in the euro (more rapid depreciation in USD) than an appreciation in the price of oil. Note how this pattern occurs after a rise in the ratio in October, which emerged as a result of a more rapid increase in oil relative to the rise in the euro. Said differently, oil is losing its ability to respond to USD weakness. Thus, any catalyst driving USD strength (stocks correction, Chinese remarks on commodities or less dovish rhetoric from Fed officials), would especially accelerate oil selling.

Oil Weakness May Intensify - OIL EUR Nov 19 (Chart 2)

Oil's relative weakness has also been highlighted against equities (S&P500 and Dow), as the equity/oil ratio surged to a 4-week high. Interestingly, US equities have outpaced those in Japan (Dow/Nikkei at highest since Dec 08), UK (Dow/FTSE at 3-month highs). Could relative strength of US equity indices be the product of currency weakness and not much more? We have already raised the S&P500s recurring failure to recover 50% of the decline from the 2007 record high to the 2006 low (1,120). The equivalent 50% retracement for the Dow stands at 10,335, which was broken on Mon, Tues, Wed but has yet to do so for the week (on Friday).

A weekly close below the 10,335 in the Dow, below 1,120 in S&P500 and a confirmed downtrend in oil (close blow $79 and 5th straight weekly lower high), would establish markets fading dynamic for risk appetite. This was already established on the currency side, amid the protracted yen strength. We warned last that yen strength would continue outperforming the much-talked-about-USD strength by pundits. Deepening weakness in oil and equities would help stabilize USD (instead of propping any major rally beyond 7%), but JPY will continue to show the greater rebound, Subscribers to our Intraday Market Thoughts are kept informed of the periodic shifts in risk appetite and the interpaly between the USD dollar and Japanese yen in drawing risk aversion flows.

Comments (Showing latest 10 of 315) View All Comments
Qiman
United States
Posts: 237
9 years ago
Jul 19, 2010 19:10
I could see no reason other than trader's fears of missing out on rising prices once some momentum got going, and then it indeed stalled out, it had no legs and slowly drifted down. CL is something I am going to be watching every pre-market for usable moves.
Trading
LONDON, UK
Posts: 57
9 years ago
Jul 19, 2010 19:07
Any reason for the early bullishness on oil today?
200DMA keeps rejecting it but also oil keeps testing it rather than being rejected like a brick wall.
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Jul 15, 2010 18:07
look at how the 200day MA failed today in crude oil

Ashraf
Stationdealer
London, UK
Posts: 715
9 years ago
Jul 8, 2010 13:01
Continued........

Fears of a U.S. double-dip recession have been eased but not dispelled despite the pullback in bonds. Recent labor and housing market data have inspired some of these fears. Such views have convinced some bond investors that the Federal Reserve will keep short-term interest rates near zero well into the second half of 2011. It is believed that the likelihood of renewed U.S. economic contraction is remote. That belief could keep benchmark bond yields from falling further after hitting 14-month lows last week.
Stationdealer
UK
Posted Anonymously
9 years ago
Jul 8, 2010 13:00
some how I wasn't able to post this earlier today.......
Stationdealer
London, UK
Posts: 715
9 years ago
Jul 8, 2010 12:57
Greater appetite for risk saw equity markets stage a rally, resulting in lower demand for bonds and Crude Oil jumping above $75. Today sees interest rate decisions from the ECB and the Bank of England.
Currencies
EUR/USD:- Fails to break 1.2700: Session highs come in around the top of the Bollinger band and hourly charts are set to peak in overbought territory. The Eur having failed at 1.2700 looks now to test bids lower at 1.2600/1.2610 Bias is still with move higher but overbought levels are a concern.
GBP/USD: Sterling maintaining bid Into London Trade A solid European session Wednesday for Cable with a broadly weaker Dollar and strong order flow supporting a move higher from 1.5082 lows to 1.5219 highs.

Into Thursday and Sterling has maintained its bid tone as London picks up the pace from Asia. With the DJIA up 2.8% and Nikkei up 2.7% the risk on play has added some support to Cable. The Overnight range was 1.5174 to 1.5230 with early London taking price up and away from a profit take 1.5174 dip.
Looking ahead, after today's BoE's rate announcement came in no change was expected.
For Cable we see price moving higher within a broad 1.5050 to 1.5385 daily bull channel with a 1.5250 break needed to bolster the trend. Look for a minor base at 1.5125-30 to stall if not hold pullbacks.

USD/JPY: Breaks higher! From range-trading on the 87 handle, USD/JPY moved up a leg alongside EUR/JPY and other JPY crosses to the 88-handle, and dealers are wondering if the next comfort zone is 88. The pair earlier traded up from an early Asian low of 87.66 through stops in the 88.05-10 area and above 88.25 to 88.47. It has since eased back a bit but remains on the 88-handle. Next resistance topside is seen at 88.50-60, 88.57 the high on July 1. More is seen at 88.70-80, 88.77 the high on June 30. Trader stops are seen above 88.60 and 88.80 as well as 89.00 but offering interest from Japanese exporters and other players will continue to be seen all the way up, not allowing this pair to charge higher. Below, standing bids are eyed from ahead of 87.50 and trailing lower. Large stops are still eyed sub-86.95, 86.96 the spike low last Thursday. USD/JPY trades 88.15/18.

Stock Market

US
Stocks had their best one-day gain in six weeks on Wednesday after a bullish forecast from financial company State Street Corp fueled optimism and encouraged investors ahead of the earnings season. Wall Streets rally helped the S&P 500 close above 1,040 points, a major technical resistance level.

Asia
Japans Nikkei average was up 2.8% on Thursday to 9,535.74, marking its best one-day rise in over a month, with exporters especially strong performers. A bullish forecast from U.S. financial firm State Street raised optimism ahead of the earnings season. State Street said its quarterly earnings would far exceed expectations, providing a lifeline for investors after weeks of dismal economic reports. U.S. jobs data last week and further strengthening in the yen had hit market sentiment and exacerbated a bearish trend for the Nikkei since April.

Europe
After U.S. stocks logged their best one-day rise in about six weeks following a bullish forecast from State Street, indices mixed in Europe with the DAX and CAC40 futures down 0.4%, while the Swiss index SMI and Italian FTSE-MIB up 1% .
Commodities

Oil
Oil jumped to a one-week high above $75 on Thursday after earnings euphoria injected positive sentiment into Asian equities, reinforcing overnight gains triggered by an industry report showing U.S. crude inventories plunged last week.
Fears of a double dip recession have eased some bit over the last month. Oil is following the equity markets and other risky assets. Crude Oil prices are still more than $12 off its 19-month peak above $87 reached in May.

Gold
Gold rose to hold above $1,200 an ounce on Thursday on steady purchases from jewellers and other physical buyers after a recent drop to a six-week low, while sentiment was also lifted by gains in equities markets. The Nikkei jumped nearly 3 percent after U.S. stocks logged their best one-day gain in about six weeks on optimism about the coming earnings season, discouraging speculators from selling gold to cover losses in other markets. It had dropped to its weakest since May 25 at $1,185.05 on Wednesday, or around 6 percent below a record high above $1,264 struck in late June, before regaining strength. Traders said gold would have to crack a June level of around $1,230 to sustain gains, but that a rebound to the current level had prompted investors to start accumulating long positions again.

Bonds
U.S. Treasury prices fell on Wednesday as a robust stock market rally drew investors into riskier assets and away from safe-haven U.S. government debt. Fears of a U.S. double-dip recession have been eased but not dispelled despite the pullback in bonds. Recent labor and h
Stationdealer
London, UK
Posts: 715
9 years ago
Jul 6, 2010 21:45
Over the past two years Crude oil has traded near $40/barrel and near $140/barrel; a $100 range equates to $100,000 on one standard futures contract, so this market is not for the faint of heart. In my opinion, the only scenario that would get prices back below $50 is another global meltdown. That is not to say there will not be opportunities to trade oil from the short side, but more often than not our trading recommendations will be bullish on Crude and its by products. Currently prices are near the median of the range trading at approximately $80/barrel. As long as Crude maintains the $70 level we would maintain a buy dips mentality thinking we could see prices trade above $90 and potentially a test of $100 late this year or early 2011.
nhtajnznfa
nhtajnznfa, Andorra
Posted Anonymously
9 years ago
Jun 16, 2010 8:44
<a href="http://avhqmwcszxjddnx.com">wibcsermgnfcbnj</a>http://pmostrtqckpujth.com [urlhttp://xbdpjkgxzelimdc.com]kspjiiwbnbyberl[/url]
mohammad
amman, Jordan
Posts: 8
9 years ago
Feb 23, 2010 0:41
Hi ashraf...

Do u see new top for oil?

it`s moving alone against the dollar since late last week...
chloethebull
Posted Anonymously
9 years ago
Feb 22, 2010 23:15
ashraf,u said oil may outperform gold what could the upside be? thanks an have a nice day