Oil Pressured by Chinese Rate Hike Fears, Gold May See Support from US CPI

Oil Pressured by Chinese Rate Hike Fears, US Data on Tap

WTI Crude Oil (NY Close): $108.11 // +1.00 // +0.93%

Prices continued to push higher after finding support at $104.82 – the 50%Fibonacci retracement of the 3/16-4/11 advance – with the bulls now poised to challenge support-turned-resistance at a rising trend line set from the lows in mid-February (now at $110.48).The 38.2% Fib at $106.85 remains as near-term support.

The turmoil in the Middle East has produced somewhat unexpected upward pressure on prices beyond supply disruptions in areas of unrest as Saudi Arabia and Kuwait, both key OPEC producers, lavish benefits on their citizens to avoid spillover of protests into their territories. This has taxed government revenues and pushed up the prices the countries must charge for crude to break even. A report from Bloomberg notes Saudi Arabia now needs prices of at least $84/barrel to balance its budget. Last year, OPEC crude sold for $77.45/barrel on average, meaning the Kingdom’s price floor has increased by a sizable 8.5 percent. With the WTI contract well north of $100/barrel, this is hardly an issue, but it may become one should a bout of risk aversion bring crude lower along with the spectrum risky assets.

Through the end of the week however, Chinese GDP figures and the US data docket are in focus. The former put downward pressure on the WTI contract amid fears of stepped-up tightening efforts in the world’s second largest consumer, but this may be offset by a healthy set of US Industrial Production figures and a pickup in the Univ. of Michigan consumer confidence gauge. US CPI data is also on tap (see below).

Commodities – Metals

Gold May See Support from US CPI but Chart Setup Warns of Losses

Spot Gold (NY Close): $1474.18 // +16.88 // +1.16%

Prices are testing resistance at $1476.45 – the April 11 high – with negative RSI divergence hinting a double top may be in the works. Initial support lines up at the bottom of a rising channel set from late January, now at $1450.37. A break through here initially exposes the 38.2% Fibonacci retracement of the 3/15-4/11 advance at $1439.89. Alternatively, a break higher exposes resistance at the channel mid-line, now at $1487.35.

As we have mentioned previously, the quarterly chart (not shown) has completed an acutely bearish Hanging Man candlestick. Similar setups in the past (the first and second quarters of 2004 and 2008 respectively) produced declines of 7.5 and 5.8 percent over the subsequent three months.

Near-term inflation expectations are in focus, with gold prices increasingly correlated with the 2-year US breakeven rates (the difference between the yields on regular and inflation-adjusted US treasury bonds of the same maturity). Needless to say, this puts the focus on the forthcoming US CPI report, with headline inflation set to hit a 14-month high at 2.6 percent in March. Firmer consumer confidence and industrial production figures stand to add to upward pressure on price growth expectations, hinting the yellow metal is likely to remain well-supported into the week-end.

Spot Silver (NY Close): $40.63 // +0.54 // +1.34%

Silver shot to another 30-year high but overall positioning is little changed, with prices still testing the top of a rising channel set from late January, with negative RSI divergence warning of losses ahead. A reversal from here initially targets the 23.6% Fibonacci retracement of the 3/17-4/11 rally at $39.98. Channel top resistance is now at $42.50.

The correlation between gold and silver remains iron-clad, suggesting the two metals will continue to move along the same trajectory and hinting the pickup in US CPI will keep prices well-supported through the week-end. The gold/silver ratio remains near record lows, meaning the cheaper metal is set to continue outperforming its more expensive counterpart.

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