Oil price declines likely short-lived

Дast week, we highlighted the potential for oil prices to correct lower from a return of USD strength and abating supply concerns - the USD Index is up +.21% on the day and DOE weekly crude oil inventories rose +2.6M versus expectations for a -0.5M drop. Oil prices declined about -2% today as the front month WTI crude oil contract currently trades around $88.85/bbl and Brent crude around the $96.39/bbl level. Admittedly, the reaction to better than expected China GDP played an unexpected role in our outlook for lower oil prices but we believe market jitters of more aggressive PBoC tightening have been exaggerated.

Real GDP out of China, the world’s second largest economy, printed +9.8% YoY versus expectations for a +9.4% increase. However, reactions to the positive growth numbers were negative. Fears of a possible ramping up in China tightening reverberated across financial markets overshadowing positive US data surprises (Weekly Jobless Claims dropped to 404k, Dec. Existing Home Sales rose +12.3%) and earnings releases. Mostly ignored, however, was the moderation in inflation – CPI dropped to 4.6% YoY from 5.1% and PPI declined to 5.9% from a prior 6.1% print – with traders more focused at the moment on rate expectations rather than rate realities. We believe steadying inflation figures are likely to balance out better than expected GDP allaying tightening pressures on the PBoC along with resultant downside pressures on commodities.

The technical picture in WTI crude oil suggests numerous hurdles to continued downside. Significant support is likely to be found into the 55-day sma (currently 87.80), which supported oil’s ascent from prior 80 range highs. Additional technical support lies directly beneath the key moving average into the 87 pivot ahead of 83.75 which sees the convergence of a multi-month rising trendline and the 100-day sma (see chart below).



While the market focuses on expectations of China tightening, the risk is for oil prices to continue lower near term. However, strengthening demand - the IEA’s most recent monthly Oil Market Report noted upwards revisions to their global demand forecast to 1.6% mainly due to a ‘firmer economic recovery’ - and technical support are likely to prevent a precipitous price decline. We believe oil prices may test key support zones around $87/ bbl and possibly $83 /bbl in coming weeks but are likely to rebound as China rate realities start to set in.

Источник: FOREX.com

21.01.2011