Crude Oil Supported by Rising Brent Prices

January crude oil price finished a little better on Friday and is in a position to post a potentially bullish weekly closing price reversal bottom. The supply/demand situation hasn’t improved, but the market has been firming because of rising Brent oil prices.

Although the fundamental picture still indicates the presence of supply concerns, the price action seems to be suggesting that the market is stabilizing, making it ripe for a potential short-covering rally. Despite bearish reports earlier in the week from the American Petroleum Institute and the U.S. Energy Information Administration, today’s price action suggests bottoming action.

On Wednesday, the API reported that U.S. crude inventories rose by 600,000 barrels last week. On Thursday, the EIA said crude supplies rose by 2.6 million barrels for the week-ended November 8. Analysts were looking for supply to rise by 1.8 million barrels.

These reports drove the market to a new five-month low on November 14, but the market rebounded nicely, suggesting that shorts were covering and speculators were buying. This wasn’t triggered by traders anticipating an increase in demand, but rather the rising spread between Brent and crude oil contracts. Currently, this spread stands at $14.93 a barrel, the widest since April 2013.

Brent oil prices began rising after talks aimed at curbing Iran’s nuclear program broke down last week-end and continued to move higher amid growing concerns over a disruption to supplies from Libya. If these worries continue then watch for rising Brent prices to drag up crude oil prices. Once the spread stops widening, January crude oil is likely to resume its downtrend as investors return to the normal fundamentals.

A firmer dollar and a technical resistance level helped drive December gold prices lower on Friday. The rally came to end after reaching 50% of the break from $1326.00 to $1260.50. This important level is $1293.25. The lack of follow-through to the upside following the short-covering rally did not come as a surprise. Since the main trend is down on the daily chart, short-sellers tend to refresh their positions following 50% corrections.

Fundamentally, investors are looking for direction from the Fed regarding the timing of its tapering plans. An early taper will be bullish for the dollar and bearish for gold. Today’s U.S. economic data could influence investors if they come out weaker than expected. This would push the prospects for a Fed taper into early 2014 which could lead to firmer gold prices. Today’s report include the Empire State survey, industrial production, capacity utilization and wholesale inventories.

The EUR/USD posted a strong gain on Friday after weaker-than-expected economic data dampened the possibility of an early taper by the Fed. This morning, it was reported that the New York state manufacturing sector unexpectedly shrank this month.  

The GBP/USD also rose after the release of the weak Empire State report. This Forex pair was also aided by the possibility that an improving economy will lead to a shift in policy by the Bank of England. Speculators are supporting the Sterling on the notion that a strengthening U.K. economy will convince the Bank of England to hike interest rates sooner-than-expected.

Later today, investors will get the opportunity to react to the latest U.S. industrial production and capacity utilization reports at 9:15 am ET. At 10 am ET, the US will report on wholesale inventories. Bearish reports should drive the dollar lower, possibly underpinning gold, the Euro and the British Pound.