By Walter de Wet
WTI crude is trading around the $75 level on the back a slightly weaker dollar. Our general view on currencies is that the euro will test lower against the dollar ($1.30 as initial target). Markets are volatile and crude oil seems destined for the same volatility.

However, we expect crude oil to react less to dollar strength than it has done in recent weeks. CFTC data indicates that speculative positions as a percentage of open interest for WTI (and other commodities) have declined substantially in the past few weeks already.

Net speculative length for WTI as percentage of open interest is at 3.2% (down from 10.5% five weeks ago). It is clear that most of the long positions have been liquidated already.

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On average, since November last year, the fall in crude oil when the dollar appreciated is smaller than the rise in crude oil when the dollar depreciated. As a result, we favor long position in WTI, denominated in euro (Commodities Daily dated 10 February 2010).

Atlantic Basin market fundamentals have tightened slightly with cold weather in the US and northern Europe, as well as the looming British and German refinery maintenance season, which begins at the end of Q1. While we doubt it could push crude higher on its own, the cold weather should support crude and product on the downside.

Thermal coal prices are under pressure but should find support from WTI. Overall, we expect problems in Europe to weigh on thermal coal. However, we expect the Euro zone economic problems to cap any major rallies rather than push prices much lower. API2 for delivery in Feb closed at $73.75 yesterday.

Courtesy: Standard Bank

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