Crude Oil Stalled by Silver?
Today's Idea
Crude Oil fundamentals remain strong over the long-term, but the weight of the Silver sell-off is finally beginning to take a toll on energy traders. There has been a domino effect of sorts - Silver selling off has adversely affected Gold, which has, in turn, weighed on commodity markets as a whole and, most notably, on energies. The near-term economic picture for the US is also more clouded than it was earlier in the year, and more doubt has crept into the market. Technically, the recent selling pressure has not done any major chart damage, but the failure to break through 115 could have a negative impact on market momentum. Some traders may wish to consider selling call options above the 115 mark. One example would be selling the June 116 call for a premium of 0.35, or $350. The initial premium would be the maximum profit and the trade has unlimited risk potential. For this reason, some traders may look to exit the position on a close in the futures above 115.
Fundamentals
Crude Oil futures have been lower in recent sessions, largely due to the steep declines in precious metals prices. There is also mounting concern among traders that China's economic growth may begin to slow in the near-term, which could hurt fuel demand. The rising energy prices come at an inopportune time in the US as well, as the labor market seemed to be turning a corner and it seemed that the economy was adding more jobs. Now consumers and businesses alike have seen their budgets squeezed by higher fuel and energy costs. This could slow Crude Oil consumption in the near-tern. The economic data released earlier this week hints at slower economic growth, as the ADP employment data and ISM Services Index both missed analysts' estimates. A confirmation of slowing job growth in the non-farm data due out tomorrow could add to bearish sentiment in the near-term. The rising margin requirements in Silver could also continue to have a negative impact on the market. Traders could lighten their commodity exposure as a whole, either of their own accord or because of margin calls. The downside in Crude Oil seems to be limited due to the tightness in high quality Crude Oil. Because of policy changes brought on by "green" politicians, high quality, low sulfur Crude is at a premium and the market is oversupplied with lower quality Crude Oil. This could prevent a sharp slide in the cash market, which may aid futures.
Technical Notes
Turning to the chart, we see the June Crude Oil contract unable to break through the 115.00 level, which could have triggered some long liquidation and profit-taking. The early price action this morning puts the June Crude Oil contract at the 106 support level on the chart. This level also coincides with the 50-day moving average. A close below the 106 mark could be seen as a negative in the near-term and could result in a test of the 100 level. If the market holds here, prices could be range-bound between 106 and 115 for the immediate future.
Rob Kurzatkowski, Senior Commodity Analyst
