Nymex Light Crude continues its sharp descent, with August 2015 futures falling below $55 per barrel. Respect of $53 would indicate the (secondary) up-trend is intact, but breach would warn of a test of primary support at $44.
Crude dives below $58
Nymex Light Crude closed below support at $58 per barrel, signaling retracement to test medium-term support at $53. Respect of $53 would suggest an advance to $68/barrel, while failure would warn of a test of primary support at $44.
June 2020 futures broke support, at $70/barrel, suggesting a test of $50/barrel*.
* Target calculation: 70 – ( 90 – 70 ) = 50
Global economy: No surprises
The global economy faces deflationary pressures as the vast credit expansion of the last 4 decades comes to an end.
Commodity prices test their 2009 lows. Breach of support at 100 on the Dow Jones UBS Commodity Index would warn of further price falls.
The dramatic fall in bulk commodity prices confirms the end of China’s massive infrastructure boom.
Crude oil, through a combination of increased production and slack demand has fallen to around $60/barrel.
Falling prices have had a sharp impact on global Resources and Energy stocks….
But in the longer term, will act as a stimulus to the global economy. Already we can see an up-turn in the Harpex index of container vessel shipping rates, signaling an increase in international trade in finished goods.
The latest OECD export statistics show who the likely beneficiaries will be. Primary producers like Brazil and Russia have suffered the most, while finished goods manufacturers like China and the European Union display growth in exports. The US experienced a drop in the first quarter of 2015, but should rebound provided the Dollar does not strengthen further.
Australia and Japan offer a similar contrast.
Oil-rich Norway (-5.8%,-13.3%) has also been hard hit. Primary producers are only likely to recover much later in the economic cycle.
Gold, silver and the Dollar
A long-term chart of silver shows strong support at $15/ounce. Recovery above $18 and 13-week Twiggs Momentum above zero would suggest that the precious metal has bottomed. A bullish sign for gold.
The picture for gold is less clear, with further tests of primary support at $1140/ounce expected. 13-Week Twiggs Momentum is also rising and recovery above zero would be a bullish sign. But breakout above $1300 is unlikely at present. Breach of support at $1140 would offer a target of $1000*.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Stocks of major gold producers like Barrick Gold remain bearish.
The Dollar Index respected its declining trendline, warning of another test of primary support at 93. Breach of support would signal a primary down-trend. A weaker Dollar would boost demand for gold and lift the US economy, enhancing the competitiveness of exporters and local manufacturers facing competition in domestic markets.
Long-term interest rates are rising, however, and provide support for the Dollar. 10-Year Treasury yields respected their new support level at 2.25% and are likely to test long-term resistance at 3.0 percent. Rising 13-week Twiggs Momentum above zero, strengthens the signal.
Gold suggests no “Grexit”
Gold reversed the gains of the last two weeks, anticipating a resolution to the eurozone’s “Grexit” crisis. Follow-though below $1170/ounce would warn of a test of primary support at $1140/$1150. Repeated peaks below zero on 13-week Twiggs Momentum signal a primary down-trend. Breach of primary support would offer a long-term target of $1000/ounce*.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Interest rates and inflation hurt gold prices
Where is inflation headed? The five-year breakeven rate (5-Year Treasury Yield minus 5-year TIPS) is hovering around 1.80 percent, close to the latest readings for core CPI. The market is anticipating low inflation for the next few years.
Long-term interest rates are rising in anticipation of Fed tightening. 10-Year Treasury yields, in a primary up-trend, are retracing to test their new support level at 2.25%. Respect is likely and would signal an advance to long-term resistance at 3.0 percent. Rising 13-week Twiggs Momentum crossed above zero, strengthening the signal.
Gold
Low inflation reduces demand for gold as an inflation-hedge, while rising interest rates increase its carrying cost for speculators and the opportunity cost for investors. These factors are exerting downward pressure on gold prices. The spot price recovered above medium-term support at $1180/ounce, but the breach continues to warn of a test of the primary level at $1140. 13-Week Twiggs Momentum peaking below zero also suggests continuation of the primary down-trend. Failure of $1140 would offer a long-term target of $1000*.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
The Gold Bugs Index, representing un-hedged gold stocks, is testing primary support at 155. Breach of support would strengthen the warning.
Crude: Where next?
Nymex Light Crude plotted against CPI gives an historical perspective on current crude prices: high prior to China’s entry into the global energy market, but low relative to prices since then. Expect strong support at the 2008 low.
Has fracking permanently suppressed oil prices, or will production dwindle over time in response to lower prices? Oil well efficiency is rising as marginal wells are mothballed.
Chart: Rising oil well efficiency in the US – pic.twitter.com/5w54OqyxKJ
— SoberLook.com (@SoberLook) June 15, 2015
Production forecasts are rising.
US shale still refuses to buckle. Not sure OPEC really winning here. From Deutsche Bank's latest pic.twitter.com/Z7wHxv3yrl
— A Evans-Pritchard (@AmbroseEP) June 16, 2015
Causing oil futures to fall. June 2020 Light Crude broke support at $70/barrel, offering a target of $55/barrel.
* Target calculation: 70 – ( 85 – 70 ) = 55
Spot prices (Nymex Light Crude) continue to range between $58 and $61 per barrel. Reversal below $58 would signal retracement to test medium-term support at $54. Breakout above $61 is unlikely at present, but would signal a rally to $68/barrel.
Crude retraces
Nymex Light Crude encountered solid resistance at $60/$61 per barrel. Reversal below $58 would signal retracement to test the new support level at $54. Respect would indicate an up-trend, while failure of $54 would test primary support at $44. Brent Crude [green] is already retracing and likely to test support at $54.
Gold breaks $1180 support
Core CPI continues to track close to the Fed target of 2.0 percent (CPI All Items is distorted by falling oil prices).
Long-term interest rates are in a primary up-trend, with 10-year Treasury note yields breakout above resistance at 2.25% offering a target of 3.0 percent. Rising 13-week Twiggs Momentum above zero strengthens the signal.
The Dollar Index continues to test support at 95. Breach would warn of a test of the primary level (and rising trendline) at 93. A sharp decline on 13-Week Twiggs Momentum indicates this is likely.
Gold
A weakening dollar would boost demand for gold, but rising interest rates counter this. Spot gold broke medium-term support at $1180/ounce, warning of a test of the primary level at $1140. 13-Week Twiggs Momentum peaks below zero suggest continuation of the primary down-trend. Failure of $1140 would offer a long-term target of $1000*.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Australian exports hammered
This chart from Westpac highlights Australia’s export misery:
Iron ore prices are falling faster than shipments are rising. Andrew Hanlan sums up the the problem facing the Australian economy:
A jump in imports coincided with a sharp fall in export earnings. Critically, the rest of the world is paying us considerably less for our key exports, iron ore and coal. This negative shock is squeezing incomes for businesses, households and government alike.