Last week, crude prices were helped by a drop in supply numbers, which added fuel to a dramatic five-week rally that increased prices by 8%. We will get new supply data today, and it seems to me that the market has baked in numbers that will support prices. The risk thus appears to be to the downside.
The technical picture of crude confirms that the road higher is now littered with obstacles. Most pressingly, we are running into strong resistance at a series of old highs that come in around $95.00 in February crude futures. A trade below $93.00 will be the first signal of a negative corrective move, and suggests an initial objective of $91.50. If $91.50 then gives way, the market should move to near $90.00.
The negative sentiment in crude prices could be intensified by the uncertainty surrounding earnings season. Both equity markets and oil markets have already priced in a good deal of positive news, so a weak earnings season could be the wet blanket on the "risk-on" trade.
I might sound bearish, but let me be clear: The longer-term story still remains positive, with good news from both Japan and China providing tailwinds in crude and equities. However, markets have a tendency to get ahead of themselves, and this makes corrections more likely. We'll see what happens -- but that seems to be just what they've done here.