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March 3, 2016, 9:12 a.m. EST

If oil doesn’t do this, then watch for a steep fall

Critical information ahead of the U.S. market’s open

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By Barbara Kollmeyer, MarketWatch


AFP/Getty Images
Long black road.

There’s a distinct whiff of optimism in the air where crude prices are concerned — something that has trickled down to stocks.

There was good and bad news in Wednesday’s U.S. crude production data. First the good: Oil production fell for a sixth straight week, and is now at the lowest since Nov. 2014, notes Commerzbank. But the bad: Inventories rose 10.4 million barrels, to a new record high.

Crude’s uphill battle

“The fact that the market is taking such longer-term aspects into account rather than looking solely at near-term inventory trends suggests that sentiment is shifting on the oil market,” says Commerzbank.

Count hedge funds as among those licking their chops and loading up on energy companies, on a bet that happy days will be here soon for oil, reported The Wall Street Journal .

But not so fast, say some. Blackwell Global, in an article for Action Forex , says the recent rally above $30 is “largely a dead-cat bounce. Subsequently, expect crude to challenge the downside in the coming weeks, as the screaming hordes of market pundits stop declaring that crude oil’s bullishness is here to stay.”

Nor is range-bound volatility on crude at its bitter end, says Michael O’Rourke, chief market strategist at JonesTrading. “We suspect that when the level of DOE [Department of Energy] inventories begin to register successive weeks of declines, the bottom is likely in,” he writes.

On to our call of the day, which zeroes in on the next big level for crude. As for stocks, where crude goes matters, as the two seem unable to agree to an amicable de-coupling.

Key market gauges

Futures on the Dow  and the S&P  are down a little, tracking oil prices. WTI crude is slipping, and hanging on above $34 a barrel, as investors chew over that inventory data.

In Asia /quotes/zigman/6959860/realtime XX:ADOW +0.59%  , it was mostly an up day, with the Nikkei /quotes/zigman/5986735/delayed JP:NIK +1.10% adding 1.3%, but the Hang Seng /quotes/zigman/2622475/delayed HK:HSI +0.50%  pulling back. Europe /quotes/zigman/2380150/delayed XX:SXXP +0.0078%  is meandering lower.

The dollar /quotes/zigman/16008150/realtime/sampled USDJPY +0.1881%  has been tapping ¥114 as equities have been getting bid. Gold is barely moving.

The call

The slippery slope

$35 a barrel. That’s the number to watch for U.S. crude prices, says FXTM’s chief market analyst Jameel Ahmad, who explains why it’s so important in a note to clients.

“Make no mistake, $35 is a superior psychological level for the commodity, and if WTI manages to close trading for the day above $35 this opens up the gates for further moves higher in price, with this obviously providing a boost to any exporters of the commodity,” he says.

Oil has been trying to recapture this level for over a month. Ahmad warns that if that doesn’t happen soon, another big move to the downside could be on the way.

“This is exactly what happened in January, when WTI failed to close above $35, with the consequence being another aggressive round of selling that led to the commodity hitting another multiyear low narrowly above $26,” he says.

Earnings

Costco could be active after the warehouse chain posted an 8.7% profit slide. Kroger /quotes/zigman/231658/composite KR -1.00%  also reports ahead of the bell, followed by H&R Block /quotes/zigman/219890/composite HRB +2.67% , Hewlett-Packard /quotes/zigman/59456673/composite HPE +0.43%   and Smith & Wesson  after the close.

The buzz


Reuters
The late Chesapeake Energy CEO Aubrey McClendon

The death of Aubrey McClendon, the 56-year-old former chief executive of Chesapeake Energy /quotes/zigman/126832/composite CHK +2.42% , is still sending shock waves throughout the industry. Known as the face of the fracking boom, he was killed in a fiery car crash on Wednesday in Oklahoma, after being indicted by a grand jury earlier in the day on antitrust charges. Tributes are pouring in:

Herbalife /quotes/zigman/361145/composite HLF +2.71%  is down 6% after the nutritional supplements seller said it had overstated new member growth. That’s good news for Bill Ackman.

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