Crude Concerned with Slow Growth in China, West
Tuesday, August 16, 2011
The potential for slower economic growth from China could limit the potential upside for Crude Oil. Slowing in the US and Europe have already cast their dark shadow over the Oil market, so the last thing the bull camp would like to see is China slow as well. Technically, prices have rebounded nicely since trading down to lows in the mid-70's. Stout resistance lies ahead for prices at 90 and 92. Some traders may wish to consider possibly entering into a bear call spread, like selling the October Crude Oil 95 calls and buying the October 97 calls at a credit of 0.50, or $500. The maximum profit would be the initial credit and the trade risks $1,500.
Fundamentals
Crude Oil futures have had a rocky ride since equity prices tumbled, but they have bounced back over 10 dollars from the lows. Many traders are now left with the question of whether or not Oil is poised to make a recovery to pre-correction levels. The fundamental landscape for energies has changed after the S&P downgrade, as some traders have begun to rethink growth forecasts for not only the US, but also other large global players. The Chinese Conference Board has indicated that growth has slowed significantly, but they hedged that statement by stating that the Chinese economy is set for a soft landing. This gives the market something to ponder. On one hand, market observers will likely have to revise down projected Crude Oil demand from China if growth slows. On the other hand, the People's Bank of China could be far less aggressive with tightening policy than many had projected. If China does indeed slow along with Europe and the US, the upside potential of the Crude Oil market could be significantly limited.
Technical Notes
Turning to the chart, we see the September Crude Oil contract forming a bullish hammer Tuesday of last week and reversing. The next levels of resistance for the Oil market come in at 90.00 and, more significantly, at 92.00. Failure to cross through these levels suggests that prices could be setting-up for range-bound trading, or possibly for a retest of near-term lows. The RSI indicator has bounced back from oversold levels and is now in neutral territory. It is also interesting to note that the momentum indicator has not bounced back from its lows to the same degree as price and RSI.
Rob Kurzatkowski, Senior Commodity Analyst
