If you are not convinced that US market is bullish despite the latest US Governmental Shutdown, you can look at WTI Crude which climbed from 102.02 to a high of 104.73 in slightly over 4 hours. This gain is even more impressive when we consider that latest inventory numbers from the US Department of Energy is actually extremely bearish, with inventory building up by 5.5 million barrels – the highest in over a year and the 8th biggest weekly build up since 2011. This build up is also much higher than the expected 2.4 million, implying a much lower demand in Crude.
However, bulls basically shrugged the decline off, with the immediate reaction to the bearish news a mere 20 cents dip. Prices pushed higher almost immediately following the dip, breaking 103.0 easily and reached the 104.5 resistance.
There was fundamental reasons for the rally, coming in the form of an announcement by TransCanada Corp who said that the Keystone pipeline expansion should be completed by the end of October. This is certainly good news, as the completion of the Keystone pipeline will provide an additional avenue for WTI supplies to be sold and transported, easing the oversupply issue which has been plaguing WTI for years. However, is this such a good news that demands a 2.5% premium in WTI prices? Of course not. This Keystone pipeline has been planned and under construction long before yesterday’s announcement, it is not as though TransCanada Corp suddenly announce a new pipeline which will be completed this month. The premium should have already been priced in, and the overreaction is certainly unwarranted. Hence it is clear that bullish sentiment and the short-squeeze scenario which we discussed yesterday both played a significant part in yesterday’s drive to 104.50.
The thing about such bullish hysteria is that prices tend to respect key resistances, hence increasing the likelihood of 104.5 holding. Stochastic readings agree as well, with a bearish cycle signal about to emerge. If the bearish cycle/pullback take flight, we could see 103.0 opening up as a bearish target once again.
Long-term wise it is a confusing time. Prices have moved back into the 103.0 – 108.5 band which should automatically open up 108.5 – 112.5 ceiling as bullish target. However stochastic readings remain unfazed, with readings continuing to point lower without even a hint of flattening. Hence, traders may wish to wait for confirmation that 103.0 is holding before assuming that price will move even higher. In this regard, 105.0 resistance may provide some reference – if price manage to break 105.0 bullish conviction may increase which will help fuel further acceleration higher.
Fundamentally current rally in crude still feels like running on hot air with nothing substantial. Whether market sentiment about US Government Shutdown or Debt Ceiling is bullish or bearish, the fact of the matter is that there is economic damage being done, which will almost certainly drive demand of crude lower with only the question of magnitude remain. Looking globally, Oil demand is still decreasing as industrial nations are all suffering right now – China, India, South Africa, Brazil and even Russia. Hence, even if crude is able to push up higher based on bullish speculation (it is possible as they have done it before), the likelihood of prices breaking the multi-year ceiling is low.
GBP/USD – Continues to place pressure on Resistance Level at 1.6250
EUR/USD – Moves to highest since February above Resistance at 1.3550
Ten Factors Affecting FX, Equities and Bonds-Oct 2nd