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Crude Oil May Pull Back on Profit-Taking, Metals Aiming Higher

Crude Oil May Pull Back on Profit-Taking, Metals Aiming Higher

2012-02-24 09:55:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • Crude Oil May Pull Back on Profit-Taking Absent Fresh Iran News-Flow
  • Gold, Silver Have Scope to Extend Gains on Dollar Weakness, Inflation Bets
  • Copper Outlook Favors the Upside Amid Broad Recovery in Risk Appetite

The fundamental landscape remains broadly supportive for commodity prices into the end of the trading week. On the economic data front, US releases are expected to show New Home Sales hit a nine-month high at 315K in January while a revision of February’s University of Michigan consumer confidence gauge sees sentiment upgraded from the preliminary reading reported 2 weeks ago. Needless to say, signs of firming recovery in the world’s largest economy are directly beneficial for cycle-sensitive copper prices.

Supportive US data likewise offers a boost to gold and silver prices. On one hand, a pickup in growth against a backdrop of ultra-loose monetary policy stokes medium-term inflation expectations, boosting store-of-value demand for precious metals. Indeed, investors’ priced-in outlook for prices over the coming 2-5 years (reflected in “breakeven” rates, the spread between nominal and inflation-adjusted Treasury bond yields) is hovering at the highest levels since May. On the other hand, a pick-up in risk appetite weighs on the safe-haven US Dollar, offering both metals a de-facto lift.

As for crude oil, while a risk-on environment is generally supportive, geopolitical considerations remain of primary near-term significance. The WTI contact has benefitted from a swelling geopolitical risk premium as Iran-linked supply disruption jitters multiply, riding them to a nine-month high yesterday. In the absence of fresh news-flow, traders may look to book profits on long positions, opting not to expose themselves to weekend risk given the inherent instability of the situation. This could force a short-term pullback.

Importantly, the probability that such an outcome will turn into a meaningful reversal appears relatively small. Recent news-flow suggests China, Japan and India – the top three buyers of Iranian crude – will substantially reduce imports amid Western pressure. Feeling increasingly isolated, Tehran might be encouraged to lash out, raising fears of an imminent conflagration that may compromise the critical Strait of Hormuz shipping lane that carries close to 40 percent of global seaborne crude supply. On balance, this suggests the situation is far cooling, with any near-term term weakness likely to prove corrective.

WTI Crude Oil (NY Close): $107.83 // +1.55 // +1.42%

Prices cleared 50% Fibonacci extension resistance at 106.70, with the bulls now aiming to challenge the 61.8% barrier at 110.04. The 106.70 level has been recast as near-term support. Notably, RSI studies are at their most overbought since April (the last time Iran-linked jitters inflated crude prices). That was followed by a sharp decline in May, so the threat of a reversal may be rising.

Crude_Oil_May_Pull_Back_on_Profit-Taking_Metals_Aiming_Higher_body_Picture_3.png, Crude Oil May Pull Back on Profit-Taking, Metals Aiming Higher

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1780.68 // +4.45 // +0.25%

The break above the December 2 high at 1763.00 exposes the 1800.00 figure as the next important barrier. Early signs of negative RSI divergence warn of lackluster bullish momentum however, warning a pullback may be ahead. The 1763.00 level has been recast as near-term support.

Crude_Oil_May_Pull_Back_on_Profit-Taking_Metals_Aiming_Higher_body_Picture_4.png, Crude Oil May Pull Back on Profit-Taking, Metals Aiming Higher

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $35.34 // +1.07 // +3.12%

Prices took out resistance at 34.37, the February 2 swing high, with the bulls now testing the October 28 top at 35.66. A break above this barrier will open the door for a challenge of the August 9 low at 36.99. The 34.37 level has been recast as near-term support.

Crude_Oil_May_Pull_Back_on_Profit-Taking_Metals_Aiming_Higher_body_Picture_5.png, Crude Oil May Pull Back on Profit-Taking, Metals Aiming Higher

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.806 // -0.028 // -0.73%

Prices continue to stall having taken out resistance at 3.789, a level now recast as near-term support. Renewed upward momentum initially targets 3.909. Alternatively, a break back below 3.789 sees rising trend line support now at 3.730.

Crude_Oil_May_Pull_Back_on_Profit-Taking_Metals_Aiming_Higher_body_Picture_6.png, Crude Oil May Pull Back on Profit-Taking, Metals Aiming Higher

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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