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Tuesday, September 2, 2008

Gustav Fizzles and Commodities Fail

Crude Oil, Gold Lead Decline in Commodities in London Trading: “Crude oil and gold led a decline in commodities in London as Hurricane Gustav spared the U.S. Gulf states the destruction caused by Katrina and Rita in 2005.

The S&P GSCI index of 24 commodity futures has dropped as much as 7 percent in two days, to the lowest since April 2. Oil is trading at a five-month low, 27 percent below the record $147.27 a barrel reached July 11.

Workers from more than 70 percent of the platforms and rigs in the Gulf were evacuated as Gustav approached. All of the area's 1.3 million barrels a day of oil and 7.06 billion cubic feet of gas, 95 percent of the total, was shut. Royal Dutch Shell Plc, Total SA and ConocoPhillips said they were inspecting offshore U.S. Gulf platforms today.”

After oil failed to bounce beyond resistance around $120, prices quickly got trapped by the 20 and 50 day EMAs (blue and red lines). Support at the 200 day EMA (green line) will now come under attack.

Overnight and early this morning, WTIC went as low as $105.50…

Failure to stay above the $110 area would result in a rapid fall to $100.

DUG has pulled back and worked off the overbought condition. With oil falling below all support, DUG should move back up... and a test of the highs around $40 is in order.

SMN has sits trapped by the 20, 50 and 200 day EMA (blue, red and green). Prices have worked off the overbought condition. A pop higher on a stronger USD and weaker commodities is in order.

The breakout is likely to fail here. The TSX 60 (XIU) is commodity heavy and overbought. With oil and PM's dropping on a stronger USD, expect XIU to move back down and test the lows around $19.50. Canada can be played from the short side using the double inverse ETF HXD.TO.

7 comments:

Rebecca Wilder said...

Fine by me. The US skirts a natural disaster, and the US Outlook gets miraculously brighter on $105/bbl oil. The markets are happy, too - the DOW, the S&P 500, the NASDAQ, and the Russell 2000 are all up.

Go oil (down, I mean)! From a macroeconomic perspective, this is wonderful news. Consumers, a.k.a. 70% of US GDP, will feel the relief as money is freed up to spend on something other than gas.

Rebecca

Ben Bittrolff said...

Rebecca,

I see it a bit differently.
I see a collapse in commodities as a sign that consumers the world over are tapped out... and that we are facing a serious global slowdown.

Equities couldn't maintain their bid today. They gapped up and slid all day...

Going forward, I actually expect down oil to equal down equities at large. This might still be a few weeks out.

Anonymous said...

Ben is absolutely correct. The fact that oil is falling has NOTHING to do with the fact that the credit crisis is still present(and spreading). The poor bastards at the Fed are in effect playing poker here, but the problem is they have no chips left... AND if the US is foolish enough to launch an attack on Iran or her allies, oil could easily rocket up to $200/barrel overnight. I wouldn't get too overconfident at this stage of the game. I still think we're going to see a big blow up before the year is out, and continuing into '09...

Rebecca Wilder said...

Hi Ben,

Yup, the markets did teeter to the negative side. Touche, but the US' share of world consumption/demand for oil fell a whole 1% to 23% since just one year ago. I think that it is understated what a slowdown in US import demand, with its 23% stake in global demand for oil, can do to the price of oil. Sure, China is growing at 10.1% a year, but it's share of world oil consumption is just 9%. The Euro Area owns 13%, and the UK, just 2%. It is more likely that the recent slide in oil is due to the strength of the USD and ongoing weakness in the US, rather than a global slowdown. But who knows.

Clearly, today's bounce in oil was, like you said, due to Gustav's miss of US infrastructure.

Thanks!

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