Crude Pulls Back After Disappointing Non-Farm Employment Report

Crude futures continued their consolidation on Tuesday, and are pulling back slightly on Wednesday after a weaker than expected non-farm employment number from the U.S.  We view crude’s current weakness as healthy behavior considering its incredible run as of late.  Additionally, we wouldn’t be surprised to see crude futures drop back towards our 2^nd tier uptrend line, especially should the ISM non-manufacturing PMI come in beneath analyst expectations.  While crude futures will continue to exhibit a positive correlation with U.S. equities, crude’s behavior today could depend on the weekly inventories release at 10:30am PST.  We saw a significant drop in crude inventories last week, helping fuel the bull-run in crude futures.  Hence, it will be interesting to see if the downtrend in inventories carries on.  If inventories come in high, crude futures will have more incentive to retrace to our 2^nd tier uptrend line.  If this should occur and the trend line doesn’t hold, keep a close eye on the psychological $65/bbl level.

Regardless of possible near-term weakness, crude’s uptrend is clearly alive and well.  The S&P futures broke through May highs yesterday, a very bullish move.  Meanwhile, both the GBP/USD and EUR/USD remain in their respective uptrends, all positive news for crude due to the positive correlations.  The recovery of PMI data globally bodes well for the consumption of crude, and rising U.S. equities only fuel the rise of crude futures.

The crude futures are still trading comfortably above our 2^nd tier uptrend line, while there haven’t been any fundamental pullbacks on high volume.  We will have to see a game-changing setback or considerable consolidation to begin to question the sustainability of crude’s medium-term uptrend.  Economic data will roll in throughout the week with the ECB and BOE meetings on Thursday, meaning volatility should remain at a heighted level for the time being.  If the economic data comes in above analyst expectations we could see another near-term pop in crude towards the psychological $70/bbl level.

Fundamentally, we maintain our supports of $67.23/bbl, $66.78/bbl, $66.18/bbl, $65.49/bbl, and $63.45/bbl.  To the topside, we find resistances of $68.02/bbl, $68.63/bbl, and naturally $70/bbl.  $65/bbl becomes a psychological cushion with $70/bbl serving as a psychological barrier.  The crude futures are currently trading at $67.50/bbl.