Look ahead: Commodities

Whether we like it or not, it appears as though crude oil is driving almost everything at the moment. It has been correlating positively with the equity markets, which makes sense because of oil’s obvious impact on the energy stocks. In forex, the likes of the CAD, NOK and RUB have all suffered big falls, which also make sense because of the fact Canada, Norway and Russia are among the oil exporting countries.

The euro meanwhile has found support in recent times because the on-going stock market sell-off (which has undoubtedly been made worse by the falling price of oil) means that traders are unwinding their carry trades. The volatility in oil prices is therefore currently having an indirect impact on the euro, too. So whatever you are trading, lose focus of oil prices at your peril!

Oil prices suffered a fresh blow this week after the U.S. Department of Energy reported a very bearish-looking oil report. Contrary to data from industry group the American Petroleum Institute, the official report showed a build of 0.2 million barrels in inventories for the week ending January 8. Although admittedly this was a very small build, it was still way off the API’s estimate of a 3.9 million barrel drop.

In addition, crude stocks at Cushing reached a record high while stocks of oil products also jumped, with gasoline inventories rising by 8.4 and distillates by 6.1 million barrels in the reporting week. The data therefore suggests that in addition to oversupply, demand may not be as strong as previously thought.

Outside of the United States, the other big worry for oil speculators is Iran’s potential return to the market, which looks imminent now. Though this will almost certainly be another bearish development for oil prices as it will mean even higher global oil supply, we probably wouldn’t see a massive reaction when the deal is announced because most of the news has already been priced in.

The full impact may be felt when the market knows for sure how much oil Iran will actually produce and what the response from its competitors will be. Will the OPEC accommodate for this additional supply by reducing existing output? We have serious doubts about that, especially given the increased tensions between Iran and Saudi Arabia recently.

Iran may have to sell its oil cheaper in order to attract fresh customers, and this may start another price war within the OPEC. So, there are lots of unanswered questions and for that reason the near term outlook for oil remains bleak.

As another brutal week comes to an end, both oil contracts are below the $30 handle as we go to press. If Brent and WTI manage to stage an unexpected rally back above their respective psychological levels now in spite of all the bearish news out there, then this would be deemed a rather bullish outcome for the first part of next week.

In addition to other technical factors, $30 on both contracts converge with the Fibonacci extensions of the previous price swings, which means the $29-30 range could be home to potential exhaustion points for oil. But if crude fails to bounce from these exhaustion points then this would strongly suggest that the selling pressure is heavy and that a breakdown towards the next psychological support at $25 could get under way soon.