Crude Oil Market Analysis

I think USO is a sell
at 46.5 area
till 41 to 40
then north to 56? Maybe?

 

Crude oil isn't going up anytime soon. It's the most manipulated market right after Gold, and right now the price of crude will stay down to put pressure on Iran. If you want to trade crude oil correctly, start following M.E. politics and look at the the spreads instead of the charts or the B.S. inventory reports the american govt and their Saudi pals put out.

 

stop run @ 51.50 bearish numbers, should bounce when it breaks those stops.

 

Crude Oil Market Analysis (1/24/07 a.m.)

Sell March crude at market currently at $54.40 with a stop at $55.25. A full analysis will be provided at the end of the day.

Dr. Chen

 

Crude Oil Market Analysis (1/24/07 p.m.)

The U.S. oil industry agrees with Crude Oil Market Analysis (“COMA”), but the market does not. As a result, COMA made the right forecast of the fundamentals but still lost money.

The reported refinery input is 14.9 million barrels per day, in line with COMA forecast. The reported import is 9.8 million barrels per day, slightly below the low end of COMA forecast. The resulting crude build of 700,000 barrels is just above the low end of COMA forecast.

The reported gasoline production is 9.1 million barrels per day, above the COMA forecast of 8.9 million barrels per day. The reported demand is 9.008 million barrels per day, in line with the COMA forecast of “below 9.0 million barrels per day.” The reported import is 911,000 barrels per day, but COMA made no forecast of the import. The gasoline build of 4.0 million barrels are above the Wall Street forecast of 1.2-1.5 million barrels, with which COMA agreed because COMA had forecast a lower production.

The reported distillate production is 3.9 million barrels per day, in line with COMA forecast. The reported demand is 4.107 million barrels per day, in line with the COMA forecast of “above 4.1 million barrels per day.” The reported import is 436,000 barrels per day, greater than the COMA forecast of over 350,000 barrels per day. As a result, the reported distillate stock has a build while COMA forecast a draw.

The market opened at $54.76 but struggled to rise above $55.00. Once the DOE report was released, the report was clearly perceived as bearish, and the market dropped from nearly $55.00 to today’s low of $53.66. From that moment on the market traded without direction as it tried to decide whether to trade up above $55.00 or trade down below $54.00 by first breaking yesterday’s high of $55.15 to reach a high of $55.26--$0.01 above COMA's buy stop at $55.25--but only to drop to a low of $54.34 later. The trading range of $0.92 is not significant, but what is significant is that the market kept trading above and below support and resistance levels without any follow-through. In the end the market chose to go up and closed $0.33 higher at $55.37.

Fundamentally, assuming that OPEC will continue to implement its production quota half-heartedly, the market supply and demand are balanced. On one hand, for every week in which the crude stock builds, there is one less week left in the winter in which the crude stock will draw. On the other hand, even Iraq, the only OPEC member who is not bound by its quota, has agreed to voluntarily reduce its output from the current 1.9 million barrels per day to 1.6 million barrels per day, reflecting at least some resolve among OPEC members to reign in production.

Technically, COMA stated on Jan. 19 that “the market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term.” After closing above $55.00 for two consecutive days, the market has placed a firm floor on $50.00 in the short term.

As COMA stated yesterday, “in the short term the market becomes difficult to forecast, because it has little direction as the bulls and bears sort themselves out in the next couple of weeks.” It is also a COMA opinion stated in a previous paragraph that “the market supply and demand are balanced.”

Result of previous trade: Short established at $54.40 today was stopped out at $55.25 for an $0.85 loss.

Strategy: Sit tight.

Dr. Chen

If you wish to read previous Crude Oil Market Analyses, please go to the archive at http://energyfutures.blogspot.com/

 

Rapid expansion in China and India has led the governments of these countries to make sweeping changes in the way they buy oil. In many cases, they are beginning to circumvent the traditional distribution networks of the New York Mercantile Exchange (NYMEX), and other bourses, entirely.

In fact, they’re undermining them, “locking up” supplies by purchasing crude from oil-producing countries directly – behind closed doors…

* Angola committed to supply China with 200,000 barrels of crude per day at $60/barrel for the next 10 years, in return for Chinese investment in infrastructure projects such as railroads, roads and bridges.

* China National Petroleum Corp. has entered joint development agreements with Sudan, which is expected to produce as much as 300,000 barrels per day. Another Chinese firm, Sinopec Corp., is erecting a pipeline from that complex to Port Sudan on the Red Sea, where the Chinese are building a tanker terminal for shipping raw crude to the Chinese mainland. Altogether, Sudan provides 10% of Chinese petroleum imports.

* India already imports about 24 million tons of crude from Saudi Arabia every year, which is 26% of its total crude imports. It has stated a desire to secure long-term contracts to assure delivery in the future. Indian public sector firms have participating interests in oil and gas projects in Vietnam, Sudan, Russia, Iraq, Iran, Myanmar, Libya, Syria, Australia, Ivory Coast, Qatar and Egypt.

The world relies on an open marketplace to set the price of energy. For decades, the NYMEX has been the epicenter of oil trade.

But China and India, in cooperation with a key supplier, Russia, have turned the tables by making bilateral agreements to lock in long-term supplies at set prices, or by forming consortiums to guarantee supply.

And these “private” oil deals are beginning to roll in…

* In Russia, Vladimir Putin has been squeezing Europe by withholding supplies of natural gas while negotiating for exclusive pipeline deals. In 2003, he dismantled the Yukos oil group who had expanded dealings with the West. He has explicitly stated that Russia will demand bilateral long-term supply contracts with consuming nations, so Russia could guarantee stable demand for its exports.

* Recent testimony before the Congressional Committee on National Security, Emerging Threats and International Relations outlined how China's three state-owned oil companies “have managed to establish control over about 3 mb/d [million barrels a day] of crude production, which could reach up to 6 mb/d by 2008.”

* In November 2005, Chinese President Hu Jintao toured Latin America and completed a number of economic deals, including an oil deal with Argentina. Hugo Chavez, the President of Venezuela, has said Chinese firms would be allowed to operate 15 mature oil fields in eastern Venezuela, which could produce more than one billion barrels. Chavez has also invited Chinese firms to bid for natural gas exploration contracts.

Led by ex-CIA chiefs John Schlesinger and John Deutsch, the group reports that the United States will be unable to achieve energy independence any time in the foreseeable future, even with massive injections of ethanol, wind power and other alternative fuels.

Noting the potential ramifications of Energy Mercantilism, it recommends radical conservation initiatives, possibly including higher gasoline taxes and gasoline rationing.

It also calls for the implementation of “an active public policy… to correct these market failures that harm U.S. economic and national security.”

All this doesn't sound good...

 

Crude Oil Market Analysis (1/25/07)

Today the market followed yesterday’s forecast that “it has little direction as the bulls and bears sort themselves out.”

The market opened at $55.16 and continued yesterday’s rise to a high of $55.87. But the market had no direction, so it turned around to drop steadily to close at $54.23.

Today’s market decline may have been caused by certain bearish news. First of all, yesterday’s DOE report was clearly bearish—and was perceived to be so after its release, so today’s market decline may have come as a delayed reaction to yesterday’s DOE report. Secondly, the market may again have embraced its skepticism that OPEC will strictly comply with its production cut after Oil Movement expects OPEC export to rise by 270,000 barrels per day for the four-week period ending Feb. 10. Finally, existing home sales in December fell to an annual rate of 6.22 million units, a 0.8% decrease from November's annual rate of 6.27 million units, culminating in the total sales for all of 2006 dropping by 8.4% to 6.48 million units from a record 7.08 million units in 2005, the steepest drop in percentage since the 17.7% drop in 1982. The foundering housing market bodes poorly for the demand for commodities such as energy and metal.

Crude Oil Market Analysis believes that the above three factors may be used as, but not necessarily are, the reasons behind the market decline today. The truth of the matter is that given the market volatility, the market does not need any particular news to move in a $1.77 range.

One major change in the market, however, warrants a special attention by market participants, which is the increasing open interest and the associated volatility. There are a record number of over 1.3 million outstanding crude oil contracts as of Jan. 16, 2007, and this record number reflects a sea change in the market sentiment toward the energy market even among the traditional hedgers. (This is not to be confused with hedge funds, which are speculators.)

Traditionally airlines, among others, are the genuine hedgers that use the futures market to hedge against risks associated with the fluctuation of energy prices. In 2006 after AMR, the parent company of American Airlines, broke even for its energy hedging operation with gains for the first half and offsetting losses for the second half, a senior AMR executive said, “hedging is one of those things you have to be careful with.” Apparently AMR was dissatisfied with the result of breaking even for its hedging operation, but AMR’s attitude toward its operation is ironic because the purpose of AMR’s hedging operation is exactly what was achieved—breaking even despite the market fluctuation of energy prices. AMR was dissatisfied with the hedging operation presumably because it viewed its hedging operation as a profit center, much in the same way Enron’s trading arm was expected to do. But AMR is in the business of transporting passengers by air, not in the business of trading energy futures. As more and more traditional hedgers view energy trading as a means of generating profit, the open interest will continue to increase, and such an increase will inevitably bring higher level of volatility to the market.

Fundamentally the market risk is gradually tipping toward the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away. As the cold weather continues while refinery turnaround remains low, the ample distillate stock that has justified the current market price will gradually shrink, thus tightening the supply at a time OPEC begins to implement its second round of production cut.

Technically, as COMA forecast yesterday, “after closing above $55.00 for two consecutive days, the market has placed a firm floor on $50.00 in the short term.”

Strategy: Buy at $53.35 with a stop at $51.85; take profit above $57.50.

Dr. Chen

If you wish to view previous Crude Oil Market Analyses, please go to http://energyfutures.blogspot.com/

 

Crude Oil Market Analysis (1/25/07 Supplement)

QUOTE OF THE DAY

Since Crude Oil Market Analysis cannot determine the precise reason for today's market decline, perhaps the best way to describe the reason behind today's market decline is to quote former Defense Secretary Donald Rumsfeld when he responded to reporter's question about the alleged link between Saddam Hussein and al-Qaeda on Feb. 12, 2002.

"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns--the ones we don't know we don't know."

Perhaps the reason behind today's market decline is either a "known unknown" or an "unknown unknown."

Dr. Chen

 

Crude Oil Market Analysis (1/26/07 Part I)

PRELUDE: IN DEFENSE OF THE BULLS

As soon as the market dropped by 36% from July’s high of $78.40 to last week’s of $49.90, some analysts began to feel vindicated and claim credit for their forecasts by saying, “I told you so when the market was at $78.”

Yes, sir! You said so last summer, but you did not say, “no hurricane will affect Gulf production this summer,” or “the winter will have record-setting warmth.” Now you claim the credit for what is due to Mother Nature. The matter of fact is that not a single hurricane affected the Gulf oil production last summer, and the U.S. Midwest and Northeast had a record-setting warmth in December. If four hurricanes had shut down Gulf oil production in the summer followed by record-setting cold temperature, today’s oil price would be close of $100, not the “high” price of $78.

The bulls who got long last summer at $78 in anticipation of these events were justified to do so. Only in hindsight do the bulls look silly. But hindsight is always 20-20.

BusinessWeek’s Feb. 5 issue calls for a supply-demand equilibrium at the current price and writes, “it’s anyone’s guess where oil prices will go from here” (p. 39). BusinessWeek cannot be wrong in its statement because that “it’s anyone’s guess where oil prices will go from here” is a perpetual truism that cannot be defeated.

Journalists write this type of “true” statement because they have to write something, as much as sports commentators make certain “true” observation because they have to make comments.

At last Sunday’s NFC Championship game between the Saints and the Bears, the Saints challenged a ruling of a fumble on the field rather than an incomplete pass. After the referee upheld the ruling on the field, a Fox Sports commentator, either Troy Aikman or Joe Buck said, “there is no conclusive evidence to overturn a call either way, so a ruling of an incomplete pass probably would also stand.” Of course, a ruling of an incomplete pass would stand as it always does because it cannot be reviewed.

(Please see Part II)

 

Crude Oil Market Analysis (1/26/07 Part II)

Today’s market action followed yesterday’s forecast, as Crude Oil Market Analysis stated yesterday that “the market does not need any particular news to move in a $1.77 range, and that “Crude Oil Market Analysis cannot determine the precise reason for today's market decline.” Instead, COMA gave a reason for the market to rise today by stating that “fundamentally the market risk is gradually tipping toward the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away.”

After yesterday’s $1.15 decline to close at $54.23, the market rose steadily from the overnight low of $54.20 to close $1.19 higher at $55.42, leaving the market almost unchanged after two days.

In addition to the persistent cold weather pattern, another bullish news today is the report by Lloyds that OPEC export fell to below 23 million barrels per day from November’s below 24 million barrels per day after having fallen 700,000 barrels per day from October. The Lloyds report is not necessarily contrary to the report yesterday by Oil Movement that OPEC export will rise by 270,000 barrels per day for the four-week period ending Feb. 10, which report may have caused the market to fall yesterday.

Although the underlying weather condition and the impending OPEC production cut on Feb. 1 both contribute to a bullish sentiment in the market, Crude Oil Market Analysis perceives a bull trap, or more precisely, a CONSPIRACY in the current market turnaround.

First of all, Nymex daily crude oil volume has been steadily falling since hitting an all-time record of 800,371 contracts on Jan. 11. Jan. 24 volume was 412,024 contracts followed by Jan. 25 volume of 367,449 contracts, two consecutive lows so far this year. The consecutive lower volumes occurred in a rising market from a low of $49.90 to above $55.00.

But an even more sinister omen is today’s CFTC’s COT report. The report shows that for the week ending on Jan. 23, 2007, a day the market had the most increase of $2.46 since Sept. 15, 2006, the net short interest increased from 2,032 contracts to 8,499 contracts amidst a steep decrease of 47,782 contracts in open interest. In other words, in a week when the market had a $3.08 increase in a sign of bottoming out, the longs were bailing out; in contrast to the previous week when the market had a $4.43 drop, the longs were rushing in.

It is not unusual that when the market begins to bottom out, the longs exit the market because those longs who were trapped in lower prices at the market bottom now sigh a relief and exit the market to cut their losses. Such a long exit usually is preceded by short-covering as the shorts see the market bottom and protect their profits.

However, the circumstances surrounding the market turnaround this time is very suspicious.

As Crude Oil Market Analysis observed on Jan. 19, “the CFTC’s COT report shows that for the week ending on Jan. 9, the non-commercial interests had gone from a net long of 2,194 contracts to a net short of 22,358 contracts, a whopping change of 24,552 contracts amidst an increase of 53,651 new open contracts. But in the following week ending on Jan. 16 the net short interests fell by 20,326 contracts to merely 2,032 contracts amidst another huge increase in open interest by 37,088 contracts.”

When COMA made the observation on Jan. 19, COMA could not explain such an unusual market action as to why the longs would pick a market bottom in a bear market before the shorts saw the market bottom, effectively attempting to force the shorts’ hands to cover “or else.”

After three weeks’ CFTC’s COT reports, a clue appears that it is not the longs who forced the shorts’ hands, but vice versa.

There has been a rumor--that is, a rumor, a gossip, a hearsay, a speculation, a guess--on Wall Street that a collapse of the Amaranth magnitude is brewing and will materialize if the market falls below $50. Such a rumor appears to be the missing link among the last three CFTC’s COT reports. The following explanation would piece together all parts of the puzzle and make sense.

The bear market was in full throttle as the bears rode the bandwagon from $61.05 all the way to $55.64, as evidenced by the influx of shorts for the week ending on Jan. 9. As the market continued to fall, certain market participants realized that they would face a margin call if the value of their contracts should decrease when crude oil drops below $50.00, and these market participants were forced to support the market by continuing to accumulate more long positions even though the shorts saw no need to cover their positions. As a result, the longs increased their strength even in a week ending on Jan. 16 when the market continued to fall from $55.64 to $51.21.

On Jan. 19 COMA could not explain this “catching-a-falling-knife” phenomenon other than to say that “as the longs are convinced that the market is going to turn at this moment, the shorts are sitting tight waiting for the next leg of downward movement.” The explanation now in retrospect is that the longs would rather take a chance to catch a falling knife than be a sitting duck and be slaughtered by the shorts, and such an epic battle between the longs and the shorts resulted in the record trading volume of 800,371 contracts on Jan. 11.

As the market held above $50.00, some shorts began to cover to take profit, which gave the market a boost. As the market rose, the longs exited mostly before $55.00 for fear of another bear assault. Once the longs exited the market on or before Jan. 23 when the market closed at $55.04, the epic battle that occurred for over a week ended, and the trading volume in the market fell precipitously to two consecutive year-to-date lows on Jan. 24 and Jan. 25 for 412,024 contracts and 367,449 contracts, respectively.

This is a big conspiracy theory, though. However, Crude Oil Market Analysis has no other ways of tying together all these facts which COMA can observe since the New Year and which do not conform to the common sense of trading. The credibility of the conspiracy theory will be proved or disproved by market action and data in the next few weeks.

Although alleging that Secretary Bodman is part of the conspiracy would be tenuous, the eerie timing of his announcement on Jan, 23 is worth noting.

Crude Oil Market Analysis stated on Jan. 19 that “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Then COMA stated on Jan. 22 that “the bulls need the market to stay above $53.10 just to avoid another bear assault to run toward the contract’s low of $51.03. However, unless Wed.’s DOE report shows a crude oil draw of 2.5 million barrels or greater, the market’s test of the $50.00 support is inevitable. In other words, it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.” COMA was fairly certain about the market’s will to retest the $50 support.

After a failed attempt by the market to trade above $54.85 to close at $52.58 on Jan. 22, on Jan. 23 the market rose steadily from the overnight low of $52.41 to $53.94 at 12:30 p.m. but could not break $54.00 and then fell to $53.23 at 1:30 p.m. In other words, the bears had done $0.70 out of the $0.93 job needed to push the market down to $53.00. Once the market touched $53.00, it would not look back and would go straight to test the contract low of $51.03 and then the $50.00 support for the March contract. And the bears had almost one hour to chip away the last 23 cents before the pit trading would close.

At this critical moment Secretary Bodman announced the U.S. plan to double its SPR to 1.5 billion in the next 20 years. Then the rest is history. The bears were as close as 23 cents away from burying the bulls. If the market had dropped below $50, the momentum would carry it to $46.20, and none of the weather conditions would have mattered because once the market decides to move in certain direction, it is blind to underlying conditions, much like a train coasting down a hill without a brake would crush any obstacles on its way.

Fundamentally, the market risk remains on the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away, thus giving the market a support for the time being.

Technically, the market looks very weak, as the market data show that the rebound in the past week was caused by longs who threw in all their weight to put a brake on a downwardly moving market in an attempt to avoid margin call and forced liquidation.

Strategy: Buy at $53.35 with a stop at $51.85; take profit above $57.50. Sell at $57.25 with a stop at $58.20; take profit below $50.00.

Dr. Chen

For previous Crude Oil Market Analyses, please go to http://energyfutures.blogspot.com/