Crude oil futures (West Texas Intermediate) is up around 82 per cent from a year ago and February delivery contracts reached a record high of $100.09 a barrel on January 3. From that top, WTI retreated towards a current level of $94.
Concern of a recession in the US is the main reason. December-employment figures were dramatically bad. Analysts were looking to 70,000 non-farm payrolls, however companies hired only 18,000 people, the lowest since 2003.
Worse, the unemployment rate jumped in December to five per cent, up from 4.7 per cent in November. This week, analysts at Morgan Stanley and Merrill Lynch projected a recession for Uncle Sam.
In a speech in Washington, Federal Reserve President Ben Bernanke pledged 'substantive additional action' to insure against 'downside risks' to the six-year economic expansion. The FOMC has aggressively cut the benchmark rate by one percentage point to 4.25 per cent since September 2007, to offset the drag from tighter lending conditions and the prolonged housing slump.
In contrast, the European Central Bank (ECB) has left its key rate at four per cent and ECB President Jean-Claude Trichet signaled it may raise borrowing costs to contain inflation even as economic growth slows. The euro hovered around a historical high of $1.4760 after touching $1.49 in December.
Lower interest rates
Goldman Sachs economists predicted that the Fed will lower its rate to 2.5 per cent by year-end 2008. Fed officials even said that it may take at least six more months before the housing markets rebound. Delinquency rates on subprime mortgages climbed to 16.3 per cent in the third quarter, the highest in at least a decade.
If demand from the biggest oil consumer in the world indeed falls, this might put pressure on the oil price. Of course it depends of the demand from Europe, China and India. Nevertheless, the oil price could drop because of the expectation that less oil is needed.
At the moment the euro is priced at a historical high. If the dollar manages to recover again, meaning the euro weakens, this also could put pressure on the oil price. If WTI doesn't manage to break the $100 ceiling, I expect a retreat towards the first support level around $86.
A break of this level consequently might lead to a fall towards $72. In regards of risk/reward, I prefer to sell oil between the current level and $100. However, a breakthrough of this big resistance might lead to acceleration towards $115.