Crude futures caught themselves after dipping below the psychological $70/bbl level yesterday. Bulls came to the rescue in reaction to the second straight shallow weekly inventory report, and the futures are skating along our 2nd tier uptrend line.  In fact, it is the 5th time in six weeks crude inventories have declined.

The steady drop in inventories has allowed crude futures to exert a relative strength in contrast to the recent weakness in U.S. and appreciation of the U.S. Dollar.  However, the fact that crude fell below $70/bbl yesterday could be a negative indicator, foreboding of a steeper pullback on the horizon.

Meanwhile, the S&P futures are flirting with the idea of a retest of their highly psychological 900 level.  Any sizeable drop below 900 in the S&P could force crude lower since they are ultimately positively correlated.

Any aggregate weakness in U.S. corporate performance would suggest a discouraged consumer, and consequently lower demand for crude.  However, OPEC maintains a tight control on supply, and the group of major oil producers hasn't indicated an increase in production any time soon.  Hence, should demand slip, OPEC will do what it can to keep supply constrained and price high.        

Regardless, we see a downtrend forming, creating a short term squeeze between our new downtrend line and our 2nd tier uptrend line.  If our 2nd tier uptrend line doesn't hold, we could see a pullback towards our 1st tier uptrend line.  Investors should keep an eye on volume.

A decline on rising volume could provide the kick to send crude tumbling towards $67/bbl.  Since we have a negative near-term outlook on equities and a positive one on the greenback, crude's correlations show there is certainly a downward force at work.  Therefore, we maintain our negative outlook on crude, though we suspect any declines should be muted as long as inventories are dropping.   

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