Judging by the previous weeks trading in WTI Crude, there appears to be no end to the strength of prices. It is very hard to see that this is driven on anything else than market sentiment, and I see this as a short squeeze before we move back lower.
Gold and silver have both reached the top of the daily ranges, with all eyes firmly pegged against the US dollar. At present levels (EURUSD = 1.4250), we should get ready to see some directional change. If the US dollar begins to see new lows, we should see some upside in Gold and Silver and vice versa if the dollar finds strength.
In general the commodity complex seems to splitting into different directions. Bumper crops in agricultural is sending Corn, Wheat and Soybeans towards new lows. Especially prices on Corn are looking particularly ominous, as the recent USDA (US Department of Agriculture) data is forecasting its second largest crop since 1945. This has put a drag on Wheat and Soybeans, with losses this quarter of approximately 20% on both, although not to the same extent as corn, which is down a colossal 30%.
Agricultural products are not down on purely the prospect of oversupply, though. Demand conditions are also very different. Like WTI Crude Oil, analysts have been raising the voices to the tight supply versus growing demand scenario facing us in the past few years. It seems to be quite the reverse, for now at least, as countries like China have already begun to signal that purchasing for their inventory stockpiling is likely to slow.
The reaction that the grains have had to supply and demand is quite natural. In simple terms, lower demand plus higher supply is equal to lower prices, which we have seen. This is unlike that of WTI Crude, where the forces of supply and demand simply do not reflect the current market direction. However, unlike that of the grains, china does still appear to be purchasing Oil, in order to fuel their expansion plans. The prices we have seen this year have, and still are, a lot lower than that of last year.
The purchasing power of China and their ability to instill uncertainty in markets takes its toll on prices, although I am not convinced that any single one economy can dominate well established markets on a global scale for longer periods of time.
The steady rally in equities also seems to be other catalyst for the rally in Crude Oil, as both markets appear to be holding hands on their way.
I can, however, only believe that they will do the same on the way down. It is very hard to estimate how far a squeeze in the market can reach, simply because it is not based on rational investor behavior. However, if Crude Oil manages to sustain a break below $66.00, it will be a good area to get short again setting up for a test of 58.50 again.
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