Saudi Production Disruption

09/16/2019 11:45 am EST


Bill Baruch

President and Founder, Blue Line Futures

Markets react to a large portion of Saudi Arabian crude oil production going offline due to weekend attacks, reports Bill Baruch.

E-mini S&P (ESU)

Last week’s close: Settled at 3006.50, down 5.25

Fundamentals: U.S benchmarks are battling to pare losses after opening lower amid geopolitical shock due to the drone attacks Saturday on a Saudi Arabian oil facility. The Abqaiq facility is known to be the most important in the world. These attacks have caused the largest ever crude oil disruptions knocking out 5.7 million barrels-per-day or more than 5% of the world’s production. The lingering uncertainties are what’s pressuring risk-sentiment. Prominently, how will Saudi Arabia and its allies, including the United States retaliate? President Trump said we are “locked and loaded” and U.S Secretary of State Pompeo has pointed blame on Iran. Although they have denied involvement, the Iranian-aligned Houthi rebels have claimed responsibility. Developments in the coming hours and days will answer this question and until then the uncertainty overshadows the nearly record setting week last week. Another pressing question is how long this capacity will be down? Although U.S benchmarks are broadly lower, the news has lifted many in the energy sector; big names such as Exxon Mobil (XOM) and Chevron (CVX) are each up more than 3%.

With the Saudi news dominating headlines, traders must not overlook preparing for Wednesday’s Federal Reserve’s Open Markets Committee (FOMC) meeting or ignore the Chinese economic data last night. Our favorite trio of Industrial Production, Fixed Asset Investment and Retail Sales all missed expectations. While Fixed Asset Investment lingers at record low levels, this was the worst growth in Industrial Production since March 2002. As for the U.S, NY Empire State Manufacturing also missed estimates this morning, however, given this number’s recent volatility, it wasn’t so bad at 2.00 vs. 4.00 expectation. Currently, the odds for the Fed to cut 25 basis points on Wednesday are at 75%, nearly two month lows. The jump in energy prices also are crucial due to potential inflation implications. Remember, CPI data last week showed steady growth once again and this began forcing participants in the Treasury complex to price-in the odds the Fed doesn’t cut.

Technicals: We will begin posting for the December contract tomorrow. Although price action through Friday did hold first key support at 3002-3004, the tape opened up below here Sunday night only trading to a high of 2998.75 since. Our momentum indicator now comes in at 3001 and this aligns, previous support and most importantly Friday’s settlement to now create a wide range of gap resistance from 3001-3006.50; only a close back above here will neutralize this near-term wave of weakness.

Similarly, this level for the NQ is 7861-7886. To the downside, there are waves of support for each. The first was tested overnight at 2978.25-2982.50 and 7786-7808. Given the overwhelming fundamental concerns ahead of the Fed, if these levels are taken out intraday, traders should be prepared additional selling. Supports that align with the September 4th gap levels are closer in the NQ at 7722.75-7744.25 when compared to the S&P at 2938.50-2946.50.

Bias: Neutral

Resistance: 3001-3004**, 3011.75-3014.50**, 3025.75-3029.50***, 3044-3057.75***

Pivot: 2991.50

Support: 2978.25-2982.50**, 2972**, 2957.25**, 2938.50-2946.50***


Resistance: 7861-7886***, 7921.50-7931**, 7960.25-7963.25***, 8014.50**

Support: 7786.50-7808**, 7722.75-7744.25***, 7668**

Crude Oil (CLV)

Last week’s close: Settled at $54.85, up 24¢ on Friday and down $1.67 on the week.

Fundamentals: Crude oil gapped higher on the open last night running through the first 7% price trigger after Saturday’s drone attacks on Saudi Arabia’s Abqaiq oil facility, the most crucial in the world (details above). At this point, there are not a lot of answers; while some say it could take a few days to recover a bulk of the production many believe we are talking weeks and months.

resident Trump announced a release of the Strategic Petroleum Reserve (SPR) last night just ahead of the open. While this is helpful, this is simply a band aid over a gash and the timing in which the SPR is effective could take days. As we await developments as to the timeline of the outage, the potential retaliation is also just as crucial. President Trump and U.S Secretary of State Pompeo have accused Iran while Iran is denying involvement. The Iran-aligned Houthi rebels have claimed responsibility and have said other facilities could be attacked. Early indications point to it being highly likely the attacks came from Iran; geographically and technically, the attack could not have come from Yemen, where the rebels are based.

Data out of China last night was dismal; all three Industrial Production, Fixed Asset Investment and Retail Sales missed.

Technicals: Expect continued volatility. The price halt was triggered on the open last night and a high of $63.34 was reached. This level aligns closely with what we have designated as a major three-star resistance level aligning a failure in May and 61.8% Fibonacci retracement from the December low back up to last October’s peak. If Crude oil, gets out above here it is not in the clear with two waves of strong resistance at $65.62 and $66.60 but there is no doubt it could run. Price action pulled back perfectly last night to ping previous major three-star resistance, a level that now acts as major three-star support and what proved to be a solid buy opportunity if you had the appetite for this volatility. Today, we view a close above or below $59.63 to $60.00 as confirming or denying the strength of the open in the near-term and on a technical basis. However, this will also be dependent on continued fundamental developments.

Bias: Neutral

Resistance: 61.50** 63.34-63.96***, 65.62***, 66.60***

Pivot: 59.63-60.00

Support: 58.45-58.86***, 57.57**, 54.85-55.00***

Gold (GCZ)

Last week’s close: Settled at $1,499.5, down $7.90 on Friday and down $16 on the week

Fundamentals: As longer-term gold bulls, one would have had to get excited on the open last night given the uptick in geopolitical uncertainties. However, last week’s bloodbath in the Treasury complex, something that was long overdue, has overshadowed a potentially more favorable safe-haven landscape. Furthermore, with the Fed’s Wednesday policy decision in the crosshairs, the catalyst of the move in bonds is pricing the probability the Fed does not cut. Currently, those odds are 25%. Given the spike in energy prices, another outlying factor becomes inflation and if the Fed is fearful inflation begins to rise more sharply than previously anticipated and this begins to handcuff their dovishness. Remember, CPI has gained steadily in recent months, confirmed last week. On the same note, data from China overnight disappointed and NY Empire Manufacturing also came in below expectations.

Technicals: Despite waves of weakness, gold never settled below major three-star support at $1,489.60 to $1,500 and this is certainly constructive. However, we must also see strength in holding rallies; something the metal struggled to do last night. First key support at $1,520.4 stopped last night’s spike in its tracks. For now, a close above $1,510.7-$1,511.1 would be crucial in confirming a bottom and continued closes below here leaves Gold vulnerable to waves of selling.

Bias: Neutral/Bullish

Resistance: 1520.4**, 1529.1-1531.9***, 1537.9*, 1546-1548.7**, 1565**, 1588.2***

Pivot: 1510.7-1511.1

Support: 1498.6-1500***, 1484.5-1487.2***

Bill Baruch provides technical levels on all markets throughout the week at

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