Bearish Weekly Inventory Report Sends Crude Oil Futures Sharply Lower

November crude oil futures broke to its lowest level since early May 2013 after the government reported an unexpected surge in supply. According to the U.S. Energy Information Administration, crude oil stocks rose 5.015M barrels versus pre-report estimates of 2.1M barrels. This bearish news comes on the heels of a weekly report from the American Petroleum Institute (API) that showed U.S. crude oil inventories expanded by 5.1 million barrels last week.

Earlier in the week, crude oil futures turned south after several days of consolidation after the International Monetary Fund (IMF) cuts its global growth forecasts. The IMF predicted the world’s economy would expand by 3.8% next year, down from a forecast of 4% in July. The catalyst behind the break in crude were fears about a weakening economy and its impact on demand.

Last week, Saudi Arabia shocked the market by announcing unexpected price cuts rather than cuts in production. Besides the cited low demand by the IMF, overproduction by the Saudi, the U.S. and Russia is also contributing to the steep decline in prices.

The short-covering rally in December Comex Gold futures continued on Wednesday, but technical factors encouraged some intraday selling as the market neared key resistance areas. The market’s fundamentals are still overwhelmingly bearish, however, since Monday’s 10-month low at $1183.30, gold has been able to mount a small relief rally.

Hedge and commodity funds are still short gold so the short rallies have not been able to shake them out of the market. Based on new economic projections about a slowing global economy, it’s hard to see the funds being shaken out of their short positions unless a major geopolitical event forces them to cover their positions aggressively.

If oversold technical factors prevail then watch for the short-covering to continue with $1250.00 a reasonable upside target before fresh shorts re-enter the market.

The Euro and British Pound rose against the U.S. Dollar ahead of today’s release of the latest Fed minutes. The EUR/USD and GBP/USD could become more active, following the release of this key economic indicator. The volatility in the market will be determined by whether the minutes contain any surprises.

The minutes are expected to show the Fed discussed the possible timing of its first interest rate hike since 2008. The minutes are also expected to provide more information about member projections and the current balance sheet reduction plan.

The EUR/USD and GBP/USD fundamentals remain bearish so it will take surprise news in the Fed minutes to trigger an upside bias and perhaps a strong short-covering rally.