Crude Oil hit a high of $84.09 on Thursday morning before investors sold into the rally in all commodities before the volatile jobs report on Friday morning. The shorts pushed Crude to a weekly low of $80.30 early Friday morning, which was a nice buying opportunity, as Crude Oil closed the electronic session on Friday at $82.84.
After the jobs report came in within expectations, there was substantial fund buying back in all the commodities across the board with the thought that the still weak job market mandates the Fed to start the QE2 Program in a serious manner.
So, Crude basically went from $76 a barrel to $84, as it was under-subscribed by fund managers at the $76 level before the product’s inventory levels started to show declines due to lower refinery utilization rates and a pickup in demand on the Distillate side.
The pending jobs report supplied the expected pullback, and now Oil is trading at just below the $83 level. It should test $85 before Wednesday of the upcoming trading week, as the rush back into commodities after the jobs report indicates that this inflation trade still has some major support and legs by investors. If Crude breaks $79 to the downside then obviously the risk trade is being taken off by investors. (see Crude technical chart)
We are entering the 4th quarter of the year, a very bullish quarter by historical standards, where fund managers start proactively managing their portfolios for hitting their yearly benchmarks. This usually implies that equities get a buying boost into the close of the year. Crude Oil trades as an asset class in part, so expect this to provide a bullish tailwind for the commodity.
The Euro appears to be gaining steam at the 1.39 level, and with QE2 starting in earnest could likely reach 1.45 by the end of the year as the inflation trade accelerates. This again would provide bullish support for Oil in the 4th quarter. (see euro chart)
Commodities trade as a group to a large extent, and with Gold leading the way, the bullish interest across the complex from the grains and agriculture space to the Soft commodities like Cotton, Coffee and Sugar, to the Metals group being buttressed by Copper and Palladium should serve as a conduit for increased capital being allocated to Crude Oil in the 4th quarter. I expect open interest to continue to climb in the Crude Oil futures contract in a steady fashion for the 4th quarter.
For Crude Oil the next major resistance level is roughly $87.50, sometime in the next month, assuming no major risk-off crisis occur, this level will be tested once again. It should hold for a while, but eventually it should provide for a solid support level, once Crude Oil blows through the $89 a barrel level.
Some signs to look for would be: Do we have $4 a pound Copper? Is the Euro above 1.43? How is QE2 being perceived? Is it a major initiative or just a minor tweaking? If we should experience $25 an ounce Silver, forget about it, the wheels have officially come off the wagon, and Crude will be around $95 a barrel heading to the $105 range.
In the near-term, expect Crude to trade between roughly $81 a barrel on major pullbacks to around $85.86 on the high side for a couple of weeks in a consolidation phase, before embarking on a test of the next higher level around the $87.50 level.
This isn’t an exact science, more of a rough guideline for the expected trading ranges of the Crude Oil Futures contract for the next couple of weeks. An unexpected economic report or dramatic surprise in inventories can always surprise traders in one direction or the other, and thus poorly positioned traders often exaggerate moves to some degree. So expect lots of volatility but with a definable upward trend to the $87 a barrel level.
Disclosure: No Positions