By Walter de Wet
WTI crude oil is trading back where it was exactly one week ago — just above $76/bbl. But there is a difference in risk perception. Last week, risk appetite was improving, and in the US, the S&P and the Dow broke above their 200d MA. Now, risk aversion is rising again, and the S&P and Dow are below their 200d MA.

However, crude oil is fairly steady despite the weakness in equity markets and strength in German and US government bond markets. The US 10y government bond yields are testing levels last seen in May 2009.

The demand for US treasuries is high and signals little concern over inflation but highlights concern over economic growth. Lower bond yields are consistent with lower equities and the stronger dollar. Given the strong correlation between crude oil and equities, we are watching US government bond yields closely.

Yesterday’s DOE inventory data showed a large rise in crude oil inventory (2,071K barrels). But gasoline inventory dropped a sizable 762K barrels. At the same time, crude inventory at Cushing dropped 826K barrels. On a day-forward-cover basis, gasoline inventories continue to see a steady improvement in the numbers, and believe this will remain the case.

Gasoline days forward cover dropped to 23.6 days (from 24 days at the start of the month). Crude oil days forward cover remains around the 24 days. We believe on a days-forward-cover basis, inventory levels should continue to recover. In our view, crude oil will trend higher from current levels in H2:10.

Front-month WTI crude oil support is at $75.07 and $74. Resistance is at $77.80 and $79.10.

Courtesy: Standard Bank

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