Crude Oil Selling Likely to Resume, Gold to Find Support on Inflation Bets

Commodities – Energy

Oil Bounce Appears Corrective, Selling Likely to Resume

WTI Crude Oil (NY Close): $107.11 // +0.86 // +0.81%

Prices found support at $104.82 – the 50%Fibonacci retracement of the 3/16-4/11 advance – and rebounded higher, closing back above the 38.2% level at $106.85. From here, the door is open for a move higher to retest support-turned-resistance at the bottom of a rising channel established from mid-March (now at $110.23).The 38.2% Fib has been recast as near-term support.

Oil prices rebounded after two days of heavy losses after a Department of Energy report showed crude inventories fell from the previous week (albeit less than economists expected). The larger issue appeared to be gasoline stockpiles, which issued the largest weekly drop in over a decade (-7k). The decline comes ahead of the summer, which tends to see an increase in demand from vacation-bound drivers, hinting seasonal upward pressure may be compounded by thin supply this time around. Buyers were further encouraged by a broadly supportive Fed Beige Book regional economic conditions survey.

Looking ahead, US Producer Price Index figures come into focus. Expectations call for headline wholesale inflation to accelerate to 6.1 percent in the year to March, the highest in 30 months. Meanwhile, core PPI (which excludes energy prices) is set to come in at a far more modest 1.9 percent, reinforcing fears that buoyant energy prices will amount to a significant headwind for the nascent economic recovery, as voiced by the IMF and the IEA earlier this week. That appears likely to weigh on prices, pegging today’s shallow rebound as corrective.

Commodities – Metals

Gold May Find Support Despite Faltering Risk Appetite

Spot Gold (NY Close): $1457.30 // +4.20 // +0.29%

Prices are stalling at the bottom of a rising channel set from late January having completed a bearish Three Inside Down candlestick pattern at resistance marked by the formation’s midline. A further bounce sees resistance at $1476.45, the April 11 high. Meanwhile, renewed selling through channel support (now at $1448.37) exposes the 38.2% Fibonacci retracement of the 3/15-4/11 advance at $1439.89.

As we have mentioned previously, the quarterly chart (not shown) has completed an acutely bearish Hanging Man candlestick. Similar setups in the past (the first and second quarters of 2004 and 2008 respectively) produced declines of 7.5 and 5.8 percent over the subsequent three months.

Near-term inflation expectations are in focus, with gold prices increasingly correlated with the 2-year US breakeven rates (the difference between the yields on regular and inflation-adjusted US treasury bonds of the same maturity). This suggests the yellow metal may begin to decouple from overall sentiment trends as tomorrow’s US PPI report crosses the wires. As discussed above, the figures are due to show energy prices pushing price growth higher; the outcome may weigh on risk appetite, pushing stocks lower amid fears that fuel costs will derail economic growth, but gold may have scope to rise nonetheless given the data’s implications for building inflationary pressure.

Spot Silver (NY Close): $40.63 // +0.54 // +1.34%

Prices found support at $39.98 – the 23.6% Fibonacci retracement of the 3/17-4/11 advance – after putting in a bearish Harami candlestick pattern below resistance at the top of a rising channel set from late January. Renewed selling from here through the 23.6% level exposes the 38.2% Fib at $38.77. The channel top, now at $42.02, remains as near-term resistance.

The correlation between gold and silver remains formidable, suggesting the two metals will continue to move along the same trajectory, and hinting a bounce in inflation expectations following the US PPI report will keep prices supported over the coming 24 hours. With that in mind, the gold/silver ratio has set another record low, meaning the cheaper metal is set to continue outperforming its more expensive counterpart.

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