Crude Futures Drop With Negative Market Psychology

August Crude futures are dropping quickly in reaction to the World Bank’s downward revision of projected global growth.  A lower global growth rate implies declining production and consequently consumption of crude.  Weekly inventories have been shallow lately and production remains constrained by OPEC, yet it is debatable whether crude futures have outdone themselves in overexcitement concerning a global economic recovery.  We’ve seen the price of crude range between roughly $40/bbl-$140/bbl in less than a year, and it seems investors are uncertain where to place fair value for the commodity.

The roughly $100/bbl trading range is historical to say the least, so we are treading on uncharted territory.  There is no reason to believe the volatility will subside with currency markets behaving like they are.  With our 2^nd tier uptrend line broken and June 8 lows being tested, it wouldn’t be surprising to see the pullback in August crude futures carry on towards our 1^st tier uptrend line and June 3 lows.  Meanwhile, investors should keep an eye on volume.  If volume continues to climb on movements to the downside, we may see a near-term downturn pick up speed.

Crude’s correlations tell a lot of the story concerning its present pullback.  Gold has dropped through key supports today, and investors are opting to invest in the Dollar in a flight from risk.  Gold has been positively correlated with crude and appreciation of the greenback makes Dollar based commodities a less desirable import, decreasing expected demand while raising future price.  Additionally, the S&P futures are contemplating a retest of the highly psychological 900 level.

All of the S&P’s correlations are painting a bleak near-term picture for U.S. equities, only adding downward pressure on expected demand and consequently future price of crude.  Hence, the near-term outlook for crude has turned negative.  The question will be whether crude can hold June lows and avoid a retest of the psychological $60/bbl.  However, it will be interesting to see how crude futures behave should U.S. inventories continue their decline since today’s move is highly psychological.

Present Price: $68.27/bbl

Resistances: $68.90/bbl, $69.56/bbl, $70.31/bbl, $70.96/bbl

Supports: $68.09/bbl, $67.68/bbl, $67.03/bbl, $65.96/bbl

Psychological: $70/bbl, $65/bbl

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