Oil prices reversed losses seen early in the week after markets responded favorably to central bank commentary from the US Federal Reserve which showed that some of the bank’s voting members are still in favor of purchasing treasury bonds as a means for stimulating economy activity. While there was no specific mention of any plans to actually make these purchases, most asset markets (high yielding currencies, commodities and the major stock indexes) pushed higher on increased investor optimism.
Focusing on commodities, one of the most significant moves of the last two weeks could be seen in oil, as the rally that has been in place since June experienced a market negative retracement which was present for most of last week.
Part of the reason for the rally came from the major sell-off in the US Dollar (which was sold along with other safe haven assets on Friday), as oil is priced in US Dollars and the two assets have a highly negative correlation (ie. If the US Dollar declines, the price of oil generally increases). Commodities analysts are now focused on the next psychological level for the commodity, as prices are trading comfortably above the $90 level and are within clear striking distance of the $100 area.
Commodities to Hinge on Manufacturing Data Going Forward
Given that most analysts are focused on the upside for energy and metals products, we will need tolook to manufacturing data as the fundamental driver for any potential bullish trends going forward. In recent months, we have seen significant manufacturing declines in most of the major economies (the Eurozone, the US, and in China), so investors will likely need to see a reversal of these trends in order to keep commodoties prices supported at the elevated levels we are seeing currently.
Other factors to consider will be seen in the performance of the US Dollar, as any weakness in this area will be another bullish influence on oil and precious metals. One potential cause of this could be seen if stimulus programs proposed by the US Federal Reserve are viewed in terms of the inflation that is likely to be created by the purchase of treasury bonds. Liquidity flows that result from any US Dollar sales in this scenario would be a major positive for the commonly traded commodities and could very well be enough of a driver to push oil prices back above the $100 level.
Oil prices experienced a forceful rally into the end of the week and prices broke key short term resistance in the 96.40 region and this brings the next technical level at 98.20 into focus. To the downside, support can now be found at 93.90 but given the clear break of the hourly downtrend channel this is looking unlikely in the coming week (as this is also where the 100 day EMA can be found). Indicator readings are still suggestive of positive momentum (with the daily RSI reading visible at neutral levels), so there is clearly room to extend to the upside before bulls will become cautious.