WTI crude bounces from $30

The Day So Far

WTI crude briefly broke below $30 a barrel last night before rallying sharply back above $31 into the US close on rumours that the Iranian Navy had captured two US naval vessels after the transgressed into Iranian waters. The focus on crude is such that this late rally lifted the S&P higher by over 10 points and this morning has broken above solid resistance at 1930 overnight after a strong Asian session. If crude can continue to bounce, equities look set for a relief rally in the days ahead and last night’s API inventory release showed further encouragement from crude oil bulls, showing a 2 consecutive week of drawdowns in US inventories of 3.9 million barrels. The sentiment for crude, and commodities in general, remains firmly bearish, and ‘short crude’ has become a very crowded trade among investors and fund managers. Therefore, a counter-trend rally here from $30 handle could rapidly gather momentum as shorts are forced to cover. The Department of Energy’s inventory release later this afternoon could prove the catalyst for more upside in crude so investors should watch the crude market in particular when trading equities given their positive correlation.

The Afternoon View

Investors tip-toeing back into risk assets this morning, helped by the crude bounce and a robust Asian session which passed by without any major drama in Chinese markets. As discussed above, much depends on crude and for now we’re prepared to give this bounce from $30 the benefit of the doubt and go long from pivot. However, for equities our strategy is to stay short for now, noting key levels at 1929.33, which acted as good support then resistance this year, and R2 which is another solid resistance point from the opening week of the year.

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