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Crude Oil Rally Likely to Resume, Gold Positioning Reveals Bearish Cues

Crude Oil Rally Likely to Resume, Gold Positioning Reveals Bearish Cues

2011-03-08 13:50:00
Ilya Spivak, Sr. Currency Strategist
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Commodities – Energy

Oil Rally to Resume as Libya Crisis Lingers

WTI Crude Oil (NY Close): $105.44 // +$1.02 // +0.98%

Commentary: Crude prices pulled back overnight – stoking a rebound in Asian and European stock exchanges – after Reuters reported that embattled Libyan leader Muammar Qaddafi offered a conditional truce (whereby he would leave the country) to rebel forces. Optimism faded as quickly as it emerged however after the opposition rejected Qaddafi’s overtures while the government resumed aerial attacks on the oil hub of Ras Lanuf. The WTI contract has now erased most of its overnight losses while stock index futures tracking the S&P 500 are back into the red having traded higher as much as 0.7% in Europe, hinting oil-driven risk aversion is back in play.

On balance, Libya ranks only 12th on the world’s top crude exporters’ list, accounting for a mere 1.5 million barrels per day of output. Therefore, the situation there is of market-moving significance in terms of shaping investors’ perceptions of what a crisis in the region could look like – bloody and disruptive rather than mostly non-violent and orderly – as had been the case in Egypt and Tunisia. To that affect, oil prices are likely to continue to advance as long as reports of bloodshed fill the headlines.

Technical Outlook: With prices firmly in the upper half of a rising channel set from the post-crisis lows in March 2009, overall positioning continues to favor aggressive gains. Near-term resistance has been found at $104.65 – the 176.4% Fibonacci extension of the May 2010 downswing – with a pullback from here seeing initial support at the 161.8% Fib ($101.31). Alternatively, renewed upward momentum targets the $110/barrel figure.

Crude_Oil_Rally_Likely_to_Resume_Gold_Positioning_Reveals_Bearish_Cues_body_03082011_OIL.png, Crude Oil Rally Likely to Resume, Gold Positioning Reveals Bearish Cues

Commodities – Metals

Gold Positioning Reveals Bearish Cues

Spot Gold (NY Close): $1432.05 // +$1.15 // +0.08%

Commentary: A firm correlation with the VIX index of stock option volatility – investors’ go-to “fear” gauge – suggests the path of least resistance for gold prices continues to lead higher turmoil in the Middle East and North Africa continues to weigh on broad-based risk appetite. Gains are underpinned by a rebound in gold ETF holdings, which now stand at the highest in nearly a month. The metal’s break-neck rally before the onset of oil-driven risk aversion hints gold may underperform however, with investors finding more attractive risk-reward parameters in other safety haven assets.

Technical Outlook: Prices have produced a bearish Gravestone Doji candlestick, with the case for a downside scenario reinforced by emerging negative divergence on relative strength studies. A break though the bottom of a rising channel set from the January bottom (now at $1423.39) initially exposes Fibonacci retracement support levels at $1412.69 and $1392.73.

Crude_Oil_Rally_Likely_to_Resume_Gold_Positioning_Reveals_Bearish_Cues_body_03082011_GLD.png, Crude Oil Rally Likely to Resume, Gold Positioning Reveals Bearish Cues

Spot Silver (NY Close): $35.61 // +$1.39 // +4.07%

Commentary: A firm correlation with the VIX index and crude oil prices suggests silver continues to mirror gold’s trading dynamics, acting as a safe-haven amid geopolitically driven risk aversion. The metal is dramatically outperforming its more expensive counterpart however, with the gold/silver ratio now at a record low. Furthermore, silver ETF holdings began to rebound nearly a month before those of gold put in their recent swing low, suggesting the cheaper metal’s compelling risk/reward parameters will see it continue to attract outsized investment demand.

Technical Outlook: Prices are testing resistance at $36.07 – the 200% Fibonacci extension of January’s downswing. A break above this barrier exposes $37.21. Near-term rising trend line support stands at $35.05, with a move below that exposing $34.23.

Crude_Oil_Rally_Likely_to_Resume_Gold_Positioning_Reveals_Bearish_Cues_body_03082011_SLV.png, Crude Oil Rally Likely to Resume, Gold Positioning Reveals Bearish Cues

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