Crude Oil Market Analysis

Crude Oil Market Analysis (1/31/07)

Today is a déjà vu all over again.

On Jan. 24 Crude Oil Market Analysis stated, “the U.S. oil industry agrees with Crude Oil Market Analysis, but the market does not. As a result, COMA made the right forecast of the fundamentals but still lost money.” The same summary applies to COMA today.

The reported refinery input is 14.8 million barrels per day, slightly above COMA forecast of 14.7 million barrels per day. The reported import is 10.0 million barrels per day, in line with COMA forecast of a recovery in import. The resulting crude build of 2.7 million barrels is closer to COMA forecast of a build of 2.0 million barrels than the Wall Street forecast of a build of 1.2-1.5 million barrels.

The reported gasoline production is 9.1 million barrels per day, slightly above COMA forecast of 9.0 million barrels per day. The reported demand is 9.1 million barrels per day, slightly above COMA forecast of 9.0 million barrels per day. The reported import is 1.3 million barrels per day, above COMA forecast of an increase from 911,000 barrels per day to 1.1 million barrels per day. The gasoline build of 3.8 million barrels is closer to COMA forecast of a build of 2.0 million barrels than the Wall Street forecast of a build of 1.4-1.6 million barrels even though COMA underestimated the import level.

The reported distillate production is 4.0 million barrels per day, slightly above COMA forecast of 3.9 million barrels per day. The reported demand is 4.5 million barrels per day, above COMA forecast of 4.3 million barrels per day. The reported import is 364,000 barrels per day, lower than COMA forecast of over 450,000 barrels per day. The distillate draw of 2.6 million barrels is slightly above COMA forecast of a draw of 2.4 million barrels.

The market opened fairly uneventfully at $56.40. After the DOE report the market traded erratically between $55.75 and $57.80. In the last half an hour, perhaps due to the FOMC announcement, the market decided to break $58.00 to reach a high of $58.20 before closing six cents lower at $58.14. The two-day rally of $4.13 is the biggest two-day rally since Dec. 14 and Dec. 15 of 2004 when the market rallied by $3.18, but at a mathematically lower percentage.

One bullish news today is that the U.S. economy grew at a 3.5% annual rate in the last quarter of 2006 after growing at a 2.0% annual rate in the prior quarter. Another bullish news that may have caused the market to finally break above $58.00 in the last half hour of trading is the FOMC announcement that sees a “somewhat firmer economic growth” and inflation pressures that “seem likely to moderate over time,” implying an ideal goldilock economy in the offing.

Fundamentally, the market’s supply and demand appear to be balanced, as the persistent cold weather will continue to draw down distillate inventory at a high rate, and the ample supply of petroleum stocks will meet the demand for the remainder of the winter in the absence of supply disruption.

Technically, the market looks very bullish, as the market did not trade around the $57.00-$57.40 resistance but rapidly traded through the resistance to close above $58.00.

Result of prior trade: Short at $57.20 established today was stopped out at $58.20 for a $1.00 loss.

Strategy: Sit tight.

Dr. Chen

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

 

"While the storm is brushing the Northeast on Friday, bitterly cold air will begin pouring into the northern Plains. The Midwest Regional News story reports over the next several days, the frigid air mass will slowly seep across the eastern half of the nation, resulting in the coldest temperatures in several years."

It seems crude could hold above $58 at least short-term

 

Crude Oil Market Analysis (2/1/07)

Today’ market action followed yesterday’s forecast when COMA forecast that “technically, the market looks very bullish, as the market did not trade around the $57.00-$57.40 resistance but rapidly traded through the resistance to close above $58.00,” but that “fundamentally, the market’s supply and demand appear to be balanced, as the persistent cold weather will continue to draw down distillate inventory at a high rate, and the ample supply of petroleum stocks will meet the demand for the remainder of the winter in the absence of supply disruption.”

The market opened in pit trading almost unchanged at $58.17 and then fell to a low of $57.10 in the wake of smaller than expected natural gas draw last week. But once the market held at $57.10 above the support of $57.00, it was taken higher by the overall bullish sentiment to a high of $58.86. Once the market failed to break $59.00 toward $60.00, there the fundamentals of the market finally set in, especially given the fresh news of the bearish natural gas inventory. The market encountered a bout of profit-taking and fell more than $1.00 in the last half an hour of trading to close $0.84 lower at $57.30.

Not surprisingly, as COMA indicated on Jan. 31, since the fundamentals of the supply and demand give the market no direction, a market that trades purely on technical indicators is directionless.

In addition to the bearish natural gas inventory, another bearish news might be that Iran announced today that it produced 4.04 million barrels of oil per day in Jan., 300,000 barrels per day above its OPEC quota.

Fundamentally, COMA reiterates its forecast yesterday that “the market’s supply and demand appear to be balanced, as the persistent cold weather will continue to draw down distillate inventory at a high rate, and the ample supply of petroleum stocks will meet the demand for the remainder of the winter in the absence of supply disruption.”

Technically, the market needs to stay above $57.00 to maintain its bullish momentum toward $59.00 to test the psychologically significant, though not technically significant, level at $60.00.

Tomorrow if the market holds above $57.10, it will trade inside today’s range, as both the bulls and the bears will take a respite after four days of intense battle in which the bulls had the northern wind behind them and forced out many of the shorts who sold the rally last week.

Strategy: Sit tight.

Dr. Chen

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

 

hello doctor ...

sorry if this has been asked before

but do you ever trade the calls you make

or are they "paper trades " ?

 

This is not a fair question. If you are a seasoned trader, then you know why this is not a fair question. If you are a new trader and do not know why, please so state, and I shall explain why.

I always welcome comments and questions on the Crude Oil Market Analysis, as I have received many positive feedbacks from my readers, and not a single response to the Crude Oil Market Analysis was negative. My stance has not changed a bit.

Dr. Chen

 

SethArb:

You have made two recommendations in response to my above reply, but those recommendations have since disappeared from this thread after I read it. Your two recommendations are summarized as follows:

First, “since COMA makes ‘calls’ on the market, you should inform COMA readers of the risk of trading.”

Second, “in order to inform COMA readers of the risk of acting on your ‘calls,’ you should establish an archive of all profits and losses of your ‘calls’.”

Your recommendations have been noted. I may act upon them when the circumstances warrant such actions.

As I understand, the stated purpose of your making such recommendations is like this, “since you are making a ‘call’ on the market, the readers of COMA may follow your calls, and those people ought to be informed of the risk involved in trading futures contracts.”

I shall respond in three steps.

First of all, the fact that COMA does not contain a disclaimer informing its readers of the risk of futures trading has nothing to do with the answer to your very first question on whether I actually act on my “calls” or trade “on paper.” In other words, regardless of whether or not I have acted on my “calls” with my money on the line, the readers of COMA will be exposed to the same level of risk if they act on COMA’s “calls” because COMA does not contain a disclaimer informing them of the trading risk. Therefore, the answer to your first question has nothing to do with your stated purpose of informing COMA readers of trading risk.

COMA readers can make their own independent judgment as to why the first question, which I deem unfair, was raised.

Secondly, I shall respond to the substance of your recommendations, that is, informing COMA readers of the risk of acting on COMA’s “calls.”

I believe that the lack of such a disclaimer will not to the slightest degree increase a COMA reader’s probability of taking on an additional trading risk, because a COMA reader who is sophisticated enough to read the entire COMA and appreciates its quality will also be sophisticated enough to act on his own judgment, as you have indicated in the disappeared reply that you did not act on any COMA “calls,” which is what I have expected. (Thank you for reading COMA.) And a reader who hypothetically would only peek at COMA’s “call” would not have found it in the first place because he would not have had the sophistication to read COMA in the first place. Therefore, the concerns about a COMA reader acting solely on the “calls” are unwarranted.

Finally, you recommend that I establish an archive of the profits and losses of all previous “calls” to inform my readers of the risk involved in acting on my “calls.” However, establishing such an archive would have exactly the opposite effect.

If the cumulative effect of all “calls” is a loss, then nobody will act on the “calls,” so establishing such an archive is unnecessary. However, if the cumulative effect of all “calls” is a profit, then the establishment of such an archive may cause some COMA readers to act on COMA’s “calls,” which is exactly what your recommendations seek to prevent. Therefore, establishing such an archive does no good and possibly only harm to COMA readers. Without knowing the track record of all COMA “calls,” a COMA reader is much less likely to act on a COMA "call" than if such a record exists.

To be faithful to the truth, I must state that COMA states the result of every trade after a position is offset under the header “Result of previous trade.” So to wit.

I have laid out my responses as to why your first question has nothing to do with your stated purpose of informing COMA readers of trading risk and also as to why your recommendations will not be adopted.

Since this is a public forum, the readers of my response shall determine whether I have responded sufficiently to your comments.

Dr. Chen

 

I vote: SUFFICIENT .

 

Sufficient, lol.

Sounds like a miscommunication. Dr. Chen, you may have got a rise out of SethArb when you weighed weather he was an experienced trader or not.

SethArb definitely is an experienced trader, and although I don't believe you meant to question that, your response could have been interpreted that way.

I have always felt that keeping record of past performance is a plus, but after reading your response I can't argue with it. Don't worry about the past performance, lol!

(but I think your stops are too tight for your trading style...perhaps a result of recommendations from all these technical traders on here)

 

I enjoy this thread and Dr. Chen's blog. His analysis is insightful and useful. I don't really pay attention to his, or anyone else's , trading recommendations. I can understand why Dr. Chen wouldn't want to start keeping a record of trades. Then he will get the inevitable challenges, well, let's see your brokerage statements, is it audited, did you account for this and that? People will complain that he is trying to drum up business for his website., etc etc. We've been down this road before and lost useful commentary because of it.

 

LOL. That certainly is a fair question.

I would just love to know why it is not.

AZD