DY: Crude Oil Gives Up Gains But Uptrend Intact, Gold Surges As Monetary Conditions To Stay Looser For Longer
Crude Oil Gives up Gains but Uptrend Intact
Crude Oil (WTI) – $84.05 // $0.06 // 0.07%
Commentary: Crude oil reversed most of Monday’s gains to fall $1.62, or 1.89%, settling at $84.11. There was no new news of significance that was responsible for the latest move, but perhaps traders finally decided to react to the Europe sovereign debt crisis or the steep rise in the U.S. Dollar. Regardless, we view the latest move as a normal fluctuation within a larger uptrend in oil, and would look for prices to resume their advance in the coming days and weeks.
Overnight, the latest reading on China’s Manufacturing Purchasing Managers Index (PMI) was released, coming in at 55.2 in November, up from the 54.7 reading in October, and better than the 54.8 consensus estimate. This was the best reading since April and up notably from the levels of July when the PMI fell to a recent low of 51.2. As China is the single most important driver of global oil demand, the data is encouraging and indicative of continued robust economic growth.
Tomorrow brings the Department of Energy report on U.S. petroleum inventories. It will be interesting to see whether the surplus continued to dwindle last week. The less-authoritative American Petroleum Institute (API) survey did not show any large movements (Crude -1.1 million, Gasoline +1 million, Distillate +0.2 million), but keep in mind that the API was way off the mark in last week’s report.
Technical Outlook: Prices reversed sharply lower following a re-test of support-turned-resistance at a rising trend line set from late September, putting in a bearish Dark Cloud Cover candlestick formation and hinting further losses ahead. Initial support stands in the $83.27-$84.43 congestion region, with a break below that targeting $79.49.
Commentary: Gold rallied notably on Tuesday, gaining $19.70, or 1.44%, to end the day at $1386.02. As has been the case in recent days, the metal shrugged off another advance in the U.S. Dollar; the trade-weighted dollar index rose 0.56%, with dollar rising against across the board– not just against the Euro.
The Eurozone crisis seems to be reinforcing the idea that monetary policy will stay exceedingly loose in most of the developed world for a long time to come. There is now also speculation that another round of government bond buying from the European Central Bank is possibility. Recall that the central bank bought 60 billion euros worth of debt earlier this year. If sovereign debt yields in Spain and Portugal continue to spiral higher, the ECB may be compelled to act again. Incidentally, even yield spreads in the “core” of the Eurozone are now beginning to widen, with those in Belgium hitting decade highs.
News flow seems to be the primary driver for gold in the near-term, for the metal’s familiar correlations with the U.S. Dollar and gold ETF holdings have completely broken down. The latter is especially puzzling, but as we’ve speculated, financial investment flows may have simply shifted to silver, with the tail now wagging the dog.
Technical Outlook: Prices are testing horizontal resistance at $1387.35, with a reversal here hinting gold is forming the right shoulder in a Head and Shoulders top formation with a neckline at $1322.39, the 38.2% Fibonacci retracement for the 7/28-11/9 advance. Should this materialize, the setup points to a measured a measured target at $1220.46 over the coming months. Alternatively, a push higher exposes the record high at $1424.60.
