Commentary: Crude oil got slammed in Tuesday's session after China raised interest rates for the first time in three years. The commodity slumped $3.59, or 4.32%, to settle at $79.49. The Chinese central bank increased its benchmark rate by 25 basis points, sending deposit rates to 2.25% and one-year lending rates to 5.56%. Given how overbought crude oil and risk assets in general had become, this was the catalyst traders were looking for to lock in profits. But the door is quite narrow when everyone is looking to exit as once, thus we saw huge moves across the board.
Fundamentally this does not change things much, but risks are always increased when monetary conditions tighten. China is still in the process of orchestrating a soft landing, and in that regard they have been largely successful so far, but with crude at the upper end of a 1-year range, it's not surprising to see a move lower. As China represents about 40% of this year's global demand growth, it is the single most important driver of oil fundamentals on the demand side. Any notable developments in the country are thus magnified by traders in the short-term, and that's how we got such a large decline.
Our outlook remains the same. Look to buy crude oil on the dips, but we wouldn't pull the trigger until the low to mid-$70's. The global economic recovery is on track and crude oil should stay well bid in such an environment. Gains will be extremely gradual, however, as supply is ample at this time. Thus, active trading is required to outperform.
Technical Outlook: After prolonged consolidation, prices finally made good on a Bearish Engulfing candlestick pattern put in on 10/7, breaking below support at the 23.6% Fibonacci retracement of the latest upswing ($81.20) to pause just ahead of the 38.2% level at $79.21. The 23.6% Fib has now been recast as resistance, with continued selling targeting the 50% level at $77.60.
