Crude and Commodities Rebound
After a relentless period of selling last week, commodity traders have been taking advantage of lower prices to add new positions. Crude joined the global stock rally today as optimism over a potential resolution to the European debt crisis began to spread. While nothing significant in the fundamentals has changed overnight, global equity markets have quickly responded to the glimmer of hope that a major financial crisis might be averted.
After weeks of volatility, traders jumped back into equities in full force today. As the Dow Jones Industrial Average moved higher by over 250 points for the second straight day, commodity prices staged a major rally with gold, silver, and copper moving higher. The price of crude oil was up $3.58 to $83.82 per barrel as traders regained their appetite for risk.
Where are prices headed from here?
The overall financial markets have clearly been in a bearish phase over the past two months. One common characteristic of a bear market is heightened volatility that can typically see big moves to the downside followed by sharp rallies. It is important to remember that changes in trend are a process and not an event. Even if the commodities have put in a short-term bottom here, expect a test of the recent lows and newly found support levels within the next few days. The behavior of the market at these key levels will be what ultimately determines where petroleum prices go from here.
If the market can hold at the recent lows and gradually stair step higher over the course of several weeks, the outlook for petroleum would begin to improve. Until this takes place, the market will continue to favor the downside. Keep in mind that short-covering rallies are often violent and result in quick moves to the upside. The subsequent drops are usually just as steep if there is no sustained buying activity to prop up prices.
The economic outlook in the United States and Europe continues to favor recession or at the very least, slow growth. This combined with early indications that the economy in China might be slowing does not bode well for demand. Add to that a strengthening U.S. dollar and you can make a reasonable case for more downward pricing pressure.
Oil prices are likely to hold some of the gains into the close of the New York trading session. Look for renewed concern over Europe to keep traders from getting overly aggressive and a retest of the lows before the market can move much higher.