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Oil May Pull Back as Iran Tensions Ease, Gold Focus Remains on QE3 Bets

Oil May Pull Back as Iran Tensions Ease, Gold Focus Remains on QE3 Bets

2012-02-16 09:09:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • Crude Oil May Reverse Lower as Iran-Driven Geopolitical Risks Subside
  • Gold, Silver Eyeing US Economic Data as Traders Shape QE3 Expectations
  • Copper Pressured Lower as S&P 500 Futures Argue for Risk Aversion

WTI Crude Oil (NY Close): $101.80 // +1.06 // +1.05%

Geopolitical forces once again undermined crude’s relationship with risk appetite trends. Prices pushed higher despite a drop in share prices after Iran’s Mehr news agency reported that the country will halt shipments to France and the Netherlands and threatened to do the same with four other European countries. An unexpected drop in weekly crude inventory readings compounded upward pressure.

Looking ahead, Iran-linked support for higher crude prices may begin to unwind. Private intelligence outfit Stratfor reported that Tehran conspicuously cancelled military exercises scheduled to take place in the Strait of Hormuz on February 19. The Strait is key sea lane ferrying close to 40 percent of global seaborne crude, so a move to cancel military operations there may be seen as conciliatory gesture hinting at behind-the-scenes efforts to reduce tension.

On the technical front, prices invalidated a Spinning Top candlestick identified yesterday with a break through resistance at 101.28. The bulls now aim to challenge the mid-November swing top at 103.35. The 101.28 level has been recast as near-term support.

Oil_May_Pull_Back_as_Iran_Tensions_Ease_Gold_Focus_Remains_on_QE3_Bets_body_Picture_3.png, Oil May Pull Back as Iran Tensions Ease, Gold Focus Remains on QE3 Bets

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1728.15 // +7.97 // +0.46%

Gold prices continue to track investors’ 2-3 year inflation expectations (tracked by “breakeven rates”, which are the difference between yields on nominal and inflation-adjusted US Treasury bonds). Prices put in their strongest performance in six sessions yesterday after minutes from January’s FOMC meeting showed some policymakers expected to introduce additional stimulus in the near term.

Notably, other members of the Fed’s rate-setting committee argued deterioration in the economic outlook would need to materialize before a so-called QE3 program is warranted. This creates a split among officials and gives a lot of weight on leading economic indicators as traders take bets on which side of the debate will prevail.

US economic releases have tended to surprise higher since the January 25 meeting. Over the coming 24 hours, the spotlight falls on Jobless Claims, Housing Starts, Building Permits and Philadelphia Fed business confidence figures. Expected outcomes fall well within improving trends established over recent months, threatening to weigh on gold prices. A slowdown in wholesale inflation may serve as a mitigating factor, with the yearly PPI growth rate set print at a 12-month low of 4.1 percent.

The trajectory of the US Dollar may also have a role to play as a transmission mechanism for risk appetite trends. S&P 500 stock index futures are pointing lower as markets reel from a delay the settlement of the second Greek bailout, threatening to put downward pressure on the yellow metal as capital pours into the safe-haven greenback.

The technical picture continues favor the downside. Prices appear to be carving out a Head and Shoulders top below resistance at 1763.00, with the peak marked by a Bearish Engulfing candlestick pattern. A daily close below H&S neckline support at 1714.05 is needed for confirmation, exposing a measured target at 1665.03.

Oil_May_Pull_Back_as_Iran_Tensions_Ease_Gold_Focus_Remains_on_QE3_Bets_body_Picture_4.png, Oil May Pull Back as Iran Tensions Ease, Gold Focus Remains on QE3 Bets

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $33.45 // -0.13 // -0.37%

Silver’s fundamental profile continues to mirror that of gold, with the US data docket in focus as QE3 expectations continue to evolve. Likewise, prices remain responsive to the influence of risk sentiment trends via their implications for the US Dollar, with the overnight drop in S&P 500 stock index futures hinting the overall environment favors the downside as the path of least resistance.

Prices continue to drift lower after breaking rising trend line support set from late December, with the bears still aiming to challenge 32.78. The trend line, now at 34.14, has been recast as near-term resistance. The gold/silver ratio continues to show a meaningful inverse relationship with stock prices, meaning the cheaper metal is likely to underperform in a risk-off scenario (and vice versa).

Oil_May_Pull_Back_as_Iran_Tensions_Ease_Gold_Focus_Remains_on_QE3_Bets_body_Picture_5.png, Oil May Pull Back as Iran Tensions Ease, Gold Focus Remains on QE3 Bets

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.802 // -0.012 // -0.31%

Copper prices continue to show a firm correlation with the S&P 500, with the overnight drop in futures tracking the benchmark index hinting the base metal is likely to follow. While risk-averse forces are emanating out of the Eurozone however, the upcoming US data set may help offset bearish forces as expectations call for leading indicators to continue showing cautious signs of improvement. Prices are testing support at 3.738, the 23.6%Fibonacci retracement. A break to the downside exposes the 38.2% Fib at 3.584. Near-term resistance lines up at 3.834, the 14.6% level.

Oil_May_Pull_Back_as_Iran_Tensions_Ease_Gold_Focus_Remains_on_QE3_Bets_body_Picture_6.png, Oil May Pull Back as Iran Tensions Ease, Gold Focus Remains on QE3 Bets

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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