Crude futures are finally deviating from their tight $70-$72.50/bbl trading range. Unfortunately for bulls, today’s move is to the downside. Sell-side volume is climbing, indicating investors are interested in participating after a week of sideways movement. Weakness in crude comes after weaker than expected Industrial Production data from China and an uncertain outlook from OPEC concerning future supply and demand. The slight setback in Industrial Production worries investors that economic growth in China may be cooling, taking a bite out of global demand for crude.

However, OPEC stated it believes China and India should continue to consume large amounts of crude through 2010, offsetting the decline in demand from developed economies. Regardless, OPEC was a bit cautious in its overall assessment since the global economic recovery is still in its early stages. As for the supply side, OPEC is concerned an increase in production from Russia and South America could place downward pressure on price should the global economy not recover as quickly as anticipated. Speaking of supply, investors will be eager to see if tomorrow’s weekly inventory report registers a surplus or deficit considering the spike in supply two weeks ago.

Meanwhile, investors should monitor the S&P’s ability to withstand profit-taking. Tomorrow’s Fed monetary policy meeting and Trade Balance data should be a good test for the bulls. Any technically significant contraction in the S&P futures could place added downward pressure on crude futures due to their positive correlation. The Euro and Pound are stabilizing against the Dollar after recent selloffs, a positive development for crude since it’s a Dollar-denominated commodity. Technically speaking, we created a new 1st tier uptrend line to compensate for today’s pullback. If our 1st tier uptrend and downtrend lines don’t hold, crude could retest June 23rd lows and the $67/bbl area. There are several more uptrend lines we can form from July 13th lows, meaning crude’s near-term uptrend is intact for the time being. As for the upside, crude faces its psychological $70/bbl level, our 2nd and 3rd tier downtrend lines and previous August highs. Therefore, crude futures have their work cut out for them to the topside.

Price: $69.05/bbl

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