Demand Uncertainty Keeps Crude Prices in Check
Crude Oil – Oil futures fell yesterday on a poor economic showing and Saudi comments regarding increased production. Retail sales showed a decline of 0.4 percent versus expectations of zero growth for the month of December. But a much more troubling figure for Crude bulls was a report by the Commerce Department showing that purchases at service stations were down by 1.7 percent. It certainly appears that consumers are beginning to feel the pressure from all sides, with a bleak employment picture, record-high fuel costs and the credit crunch leading to tighter lending standards. All of these factors point toward a decrease in spending power for the American consumer, which is especially troubling considering the fact that the economic growth seen after the "dot com bust" was driven by consumers spending at or above their means and a robust housing sector – both of which have crashed and burned. A slowdown in corporate growth would also likely lead to slower petroleum usage and may cause the International Energy Administration to cut their demand forecast for 2008. Saudi Oil Minister Ali al-Naimi commented that it may be time for OPEC to increase production. While this defies logic – potentially leading to a price collapse in the near term – a production increase could aid the global economy and lead to stronger future demand. This long-range move would probably provide an opening to central banks around the world to implement expansionary policies due to a lowered threat of inflation, softening the blow of a downturn. Today's EIA inventories numbers are expected to show a build of around 1 million barrels of Crude Oil, a 1.55 million barrel build in distillates and a 2.5 million barrel build in gasoline stocks. The March Crude Oil chart negated a short-term reversal pattern to close below the 50-day moving average, which could be seen a bearish longer-term signal. The chart also appears to show the formation of a bearish consolidation pattern, which could spark sell-offs toward $86 in the near-term if validated. One positive technical factor is the bullish divergence between the momentum and RSI indicators, but the divergence is only very slight. Support comes in at 90.22, 88.94 and 87.02, while resistance can be found at 93.42, 95.33 and 96.62.
S&P – Stock indexes suffered heavy losses due to the poor showing on the economic front and the inability of Citigroup to reassure investors. The banking giant reported a loss of $8.83 billion and slashed its dividend by 41 percent. The dividend cut may be the far more troubling of the two figures, as it could be a harbinger of more write-downs related to CDO's and other mortgage-backed investments. Merrill Lynch, State Street and Bank of America all hinted at further losses due to subprime investments as well. The decline was not as bad as it could have been, as the poor retail sales figures and tame PPI data did somewhat buffer the slide in equities, fostering a perception among traders that the data could be the tipping point toward a half point cut by the Fed. Today is a report-heavy day, starting with the release of CPI data at 7:30 AM CST, which is forecast to rise 0.2 percent for both the aggregate and core figures. Industrial production released at 9:00 AM CST is expected to drop 0.2 percent, with a capacity utilization of 81.2 percent. Perhaps the most anticipated report of the day is the Beige Book at 1:00 PM CST, which will give traders some insight into the mindset of the Fed and provide a clearer picture of what economic datasets may influence the central bank more than others. The March e-mini S&P broke out of a bearish triangle pattern on the daily chart, suggesting the futures may test the 1350-1355 area. The market failed to establish support around the 1400 mark, which may cause traders to be wary near key psychological support areas in the near future. Support comes in at 1363.75, 1349 and 1319.75, while resistance can be found at 1407.50, 1437 and 1451.50.
Wheat – Wheat futures got a shot in the arm from freezing temperatures across the eastern portion of the Midwest. New crop futures have surged relative to the old crop due to a decrease in acres sown and strong early tenders. Farmers may have sown Wheat at a lesser depth than in prior years in an effort to get higher yields and speed up emergence – a risky strategy that further exposes the crop to the elements, such as this latest frost. July Wheat made new contract highs, giving confirmation to Monday's breakout above 830. Due to slumping prices prior to the USDA report, the RSI still has room to run before the market encounters overbought conditions. This has really been a dynamic week of trading, with the July contract looking as though it was going to take out support and then breaking out to new highs. Support comes in at 824, 796 and 775, while resistance can be found at 873, 894 and 922.
Rob Kurzatkowski, Commodity Analyst
