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Crude on the back foot as traders shrug off record Chinese oil imports

by Fawad Razaqzada

The biggest market-moving events so far this week have come from China. First, it was the disappointing trade figures that were released over the weekend which showed exports had tumbled some 8.3% in July from a year earlier. Chinese imports weren’t great either, though inward shipments of crude oil in July climbed to a record high on a monthly basis which helped to underpin Brent and WTI prices on Monday. Nevertheless, concerns about the Chinese economy remains in focus which is continuing to weigh heavily on commodities across the board. This view has been reinforced by China’s surprise move on Tuesday to weaken the yuan’s daily reference rate by a record 1.9%. The PBOC said this was a one-off adjustment as the yuan's effective rate was stronger than that of the other currencies. But the devaluation triggered a “risk off" response from traders, which saw stocks and commodities fall sharply along with the yuan and Australian dollar, assets that are sensitive to changes or perceived changes in Chinese demand. Clearly, the market interpreted the move as a sign that the health of the Chinese economy is probably worse than even what the official data suggests. Wednesday’s industrial data from the world’s second largest economy is therefore likely to garner more attention than usual.

Meanwhile only the supply front, not much has changed. If anything, the excess surplus has increased. Indeed, the OPEC raised its output by 100,700 barrels a day (mb/d) to 31.5 million last month, the most in more than three years and significantly higher than the required 29.2 mb/d for 2015. According the OPEC, output increased from Iraq, Angola, Saudi Arabia and Iran, while production in Libya fell.

Crude oil’s rally on Monday looks increasingly like a mere short-covering bounce rather than a trend reversal, though things could change as we are only half way through the week. The London-based Brent oil contract tried to break sturdy resistance at $51.00 on Tuesday. This followed Monday’s sharp rally which resulted in the creation of a bullish engulfing candle on the daily chart, a pattern which sometimes suggests a change in the trend. The $51.00 level marks a key technical area as not only was it previously resistance but it also ties in with the upper trend of the bearish channel. Only a closing break above $51.00 would invalidate the near term bearish trend. If seen, Brent could easily recover to $52.50 or even $55.00 before deciding on its next move. But the more likely outcome is that the sellers would defend this level, leading to further weakness in the days ahead. Indeed, a closing break below Monday’s low of $48.20 could pave the way for move towards the lower trend of the bearish channel and this year’s low at $45.15.

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