Oil stuck between present reality and future expectations

Better than expected corporate earnings saved the energy sector this week after Crude on Wednesday had its biggest drop in more than three month as data pointed to a system increasingly oversupplied.

The commodity sector and especially energy ran into a brick wall on Wednesday as they were hit by a series of non friendly news. The dollar halted its recent slide, the Chinese stock market went into reverse and the weekly storage data showed a surprising strong increase in Crude stocks.

The recent dollar selling against the Euro ran out of steam as the pair failed to breach the June high at 1.4330. Commodity markets continue its strong link to dollar moves and this removed some of the recent support.

China sneezed as its stock market saw a big one day sell off on the back of news that bank lending had to be reduced in order to avoid the system overheating. This led to the usual worries that China's strong demand for commodities could be reduced.

The storage point for NYMEX WTI Crude, saw an increase of 1.3 million barrels to 32.12m which is close to the February high of 34.9m. The spread between September and October almost touched $2.0 after having traded as low as $0.5 back in June.

Another rise of Cushing inventories will be difficult for the market to overlook and could lead to further widening of the Contango and the spread between North Sea Brent Crude and WTI Crude. September Brent has this month outperformed September WTI Crude by more than four dollars.

One Investment Bank estimates that a total of 140 m barrels of Crude Oil is currently stored offshore which equates to 70 VLCC (Very Large Crude Carriers) as demand from developed nations continue to lag behind production. A lot of Crude surplus has gone into the production of refined products these past few months but the same lack of demand has pushed stockpiles to daunting high levels.

It is clear that current news and statistics do not support prices but the rally in stock markets on expectations that the global economy has turned a corner and will pick up steam in 2010 is a theme favored by many hence the current stalemate between $60 and 70.

Technically the September Crude is stuck between $59.30 and $70 with the downside being favoured. Some support should be found at $61.50 ahead of the recent low at $59.30.

Gold found sellers above $950 as disappointed investors took the opportunity to reduce positions after the recent rally and switched into equity markets instead. This has also been reflected through the holdings in ETFs which has seen the biggest monthly outflow of investments since April last year.

IMF announced they plan to sell 403 tonnes of Gold within a new European Central Bank gold pact currently being negotiated. Market impact seems to be limited as the sale will be spread out over 2-3 years and will be part of a new Central Bank Gold Sales Agreement CBGA which should be finalized by October.

Technically spot Gold is in a triangular formation with the current range being $916 to 980 with near term support being 100 day moving average at $925 and resistance at $942 and $960. Sooner or later the recent rally in stock markets will have to be tested and that should lend investors a hand but as talk of inflation get pushed further out we would expect additional long liquidation on any rallies.