Commodities Lower after Economic Data
Oil prices posted their third straight weekly drop as investors largely shrugged of positive economic data (which should be encouraging for energy prices on improved manufacturing expectations) and send prices lower as excessive supply levels are seen in the post-Summer period. With the decreased demand that is generally seen in the month of October, this is not surprising as supply and demand ratios are not in line for a sustainable run higher for the short term. The biggest story in the macroeconomic arena was the drop below 8 percent in the US unemployment rate but energy markets were focused on areas that more directly affect the dynamics of oil sales.
This week’s activity completes the biggest streak of weekly losses that we have seen since June and the major driver was the latest crude oil data, which showed that outputs in crude production grew to 6.52 million barrels per day in the previous week, which is the highest level since December 1996. Figures that are this drastic are difficult to overlook (even when encouraging macroeconomic data is seen), and Oil contracts were lower as a result. So if we are looking to assess exactly what happened in these markets last week, we can say that the current declines would have have been much more drastic if the broader economic data had not come in above market expectations.
Similar Moves Seen in Gold Markets
Similar moves were seen in Gold as prices fell from near yearly highs, matching moves seen in Silver price as well. These moves are counter to the Federal Reserve announcement to begin its third round of quantitative easing, which was seen recently. This program is widely expected to increase inflation levels and bring down the value of the US Dollar and since Gold is priced in Dollars, this is largely positive for Gold prices.
But with Gold for December delivery falling by nearly 1 percent, it is clear that the short term trend in commodities is down as traders in these markets tend to shy away from macro economic factors and choose to instead look at events that have more direct ties to the supply and demand outlook for each individual asset. For these reasons, traders in these markets will benefit more substantially from technical analysis as breaks of critical levels will tend to see follow through in excess of what is normally seen.
Technical Perspective
Commodities are showing some interesting moves with respect to Fibonacci levels. Better trading opportunities can be seen in Oil, so we will focus on that, with prices failing to close below the 61.8% retracement of the move from 87.70. We did, however, see a break here, and since price are showing weakness below key psychological areas ($90), there is a greater likelihood that next week will be closing in negative territory. Any significant downside breaks here will be very bearish, as the next target quickly becomes a retest of the prior 87.70 lows. Preferred strategy is to sell rallies.
