The case for $90 Crude in June
First the fundamentals:
· US. Supplies have climbed to an 82yr high. Tomorrow's Inventory numbers probably gained even further to 450KBls according to the EIA increasing the notion of another buildup occurring in US inventories.
· China as the world already knows is in the midst of a shift from from the import driven nation, which will decrease the shipment of metals, and energy from their trading partners throughout this year.
· Recently as shown through various Central bank interest rate cuts notably the RBA commodity export countries are bracing for a slowdown in resource growth and buffering for a hard landing. China and other Asian economies are the main proponents for this action.
1. There has been a notable increase in contracts traded. Yesterday we traded 553,893c, which is an 8.3% increase from the 3-month average.
· 5/14 Dollar Index reached a NEW YTD high, which puts further pressure on the appeal of holding dollar-denominated raw materials as an investment. Dollar Index is set to continue the upward trend for sometime (until exporters start voicing their concern) which makes it even more difficult to be a bidder on most commodities.
This all bodes well for the consumer who is getting more bang for their buck at the pump further spurring an incentive for discretionary spending but, the market is screaming for lower oil prices based on a broken chart and a oversupply hang. The other side will point to the great recovery we are experiencing by the increase in credit, real estate values, improving balance sheets and a runaway stock market but to that I say this... what is the return on energy futures v. Index futures YTD?
· $DJIA 16.5%, $RUT 16.2%, $ES 16.1%
· $USD 4.9%
· $Crude 2.6%
Now its foolish to think that energy futures or any other commodity based contract to trade in tandem with the stock market because we all know there are other mechanics at work (like Central Banks using reserves to buy ETF's instead of money market, or short term bills to capture yield that very few are even talking about which is scary) but the lack of participation in certain commodities is evident that prices want to go lower.
This is a piece for a thesis on a macro trade but what about the next few weeks or days? Like mentioned above contracts trading hands and implied vols are trading higher then the average and any speculator knows that volatility is greatest before a shift in trend and that is what we are starting to experience this week.
· 5/6 saw Crude touch the downward YTD channel (2/13, 4/1) and fail once more setting in motion what can be perceived as a triple top
· The last time when Crude traded and closed below $95 was 4/3, which was the second day after it failed to breakout of the downward channel to the upside. This set in motion a move lower for most of April to the upper $85 level before rebounding once more.
· Yesterday (5/15) we again closed below $95 after failing for a third time to breakout of this downward channel to the upside just 7 sessions ago.
· Today we finally saw the bulls throw in the towel in defending the 78.6% retracement 4/15low-5/6hi ($94.78) sending us down to $93.85 before profit taking came in EOD.
· Looking at a simple Monthly bar chart we are vulnerable to test May's open, which is 93.08. Based on a few data points later this week we can easily touch. Also if we look at the same monthly chart we will see a floor price that the market has insulated which is around $91.75.
· Because the target is $90 we are expecting an overshoot of offers once 91.75-.50 are tapped causing prices to purge.
Before the purge can happen there are shorter time frames that need to be breached in order for this short to occur notably the 61.8% retracement at 92.88 4/15low-5/6 hi but like I mentioned above if we break the May open price than this barrier will not be to difficult. I'm not expecting a close or move lower than $90 simply because if this is occurring than the equity markets and just about all markets would be red across the board and that is not likely right now.
If tomorrows numbers show no follow through on the crude short we should see a retrace to test the new resistance of $94.75-80 78.6% before we continue lower over the course of this month and into June.
We'll see everyone in the morning for inventories numbers.