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Chart of the Day: WTI crude (WTIUSD)

While the S&P 500 hones in on a runaway breakout and new all-time highs, we’ve seen WTI crude prices collapse 4.7% — the biggest fall since 31 May and the third largest decline of 2019.

Chart of the Day - July 3, 2019 - XTIUSD

We’ve focused on the WTI crude chart of late, not just because it’s had punchy moves in price but because US and global inflation expectations are so correlated to movement in the crude price. This is important because the Federal Reserve looks at inflation expectations, which we can measure through US forward inflation swaps. We can also see these have fallen 5bp (in US trade), and are threatening to head below 2%. A move through 2% accelerates the idea that global central banks need to ease more aggressively, which in turn is boosting equity inflows. Liquidity, as they say, is king.

The fact we’ve heard confirmation that OPEC and Russia are extending output cuts by a further nine months seems to have gone above and beyond consensus expectations for an additional six months. Even still, this seems to have underwhelmed. Many have focused on the fact that non-OPEC output continues to pick up the loss of OPEC production, and this has led to a loss of market share for the cartel. Importantly, the demand side of the equation is now clearly impacting sentiment, and many have pointed to the weakening global manufacturing PMIs as a negative catalyst.

Clearly, the setup on the daily chart is bearish, and a move into US$55.50 (the 50% retracement of the June rally) can’t be ruled out. With price holding below all short-term moving averages, it feels as though rallies are there to be sold, and we watch the Department of Energy weekly inventory report (due 00:30 AEST tonight) as a near-term risk.

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