Crude Oil Market Analysis

Crude Oil Market Analysis (2/2/07)

Today’s market action is no surprise given yesterday’s COMA forecast that “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.”

The market opened below $58.00 at $57.93 and then tested the support at $57.00 again but held at $57.05 at 10:30 a.m. From that point on, the market kept its bullish trend and broke yesterday’s high at $58.86 to close $1.72 higher at $59.02.

One bullish news is that Nigeria’s oil workers may start strike as early as next Monday. Another bullish news is that President Chavez threatens to nationalize four oil projects with the combined production of 600,000 barrels per day, even though the news was known yesterday when the market dropped by 83 cents.

It seems that the bears were skinned this week.

The CFTC’s COT report shows that for the week ending on Jan. 30, 2007, a day the market had the most increase of $2.92 since Sept. 15, 2006, the net short interest increased from 8,499 contracts to 14,342 contracts amidst an increase of 37,398 contracts in open interest. In other words, in a week when the market had a $1.95 increase, the shorts were coming in to sell the rally. This explains why today the market shot up by as much as $1.60 to $59.10 after failing to break support at $57.00.

Fundamentally, COMA reiterates its forecast on Jan. 31 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.” However, the market sentiment has changed since Jan. 31, as evidenced by the fact that the March contract increased by $1.72 while the Dec. 2008 contract increased by $1.90, indicating that the market has begun to place some premium on the geopolitical risk in the supply of oil.

Technically, the very fact that the market closed above $59.00 indicates that the test and break of the psychologically significant, though not technically significant, $60.00 are imminent.

Strategy: Sit tight.

Dr. Chen

To read the archive of Crude Oil Market Analysis, please go to http://energyfutures.blogspot.com/
 
Crude Oil Market Analysis (2/2/07 Supplement)

After the sentence:

"However, the market sentiment has changed since Jan. 31, as evidenced by the fact that the March contract increased by $1.72 while the Dec. 2008 contract increased by $1.90, indicating that the market has begun to place some premium on the geopolitical risk in the supply of oil."

The following sentence should be added:

"In contrast, on Jan. 23 when the market rallied $2.46, the most since Sept. 19, 2005 up until that time, in the wake of Secretary Bodman's announcement of the doubling of the SPR in 20 years, although the March 2007 contract rallied by $2.46, the contract for December 2012, when the U.S. still needs to fill its SPR, rose only a nominal $0.89."

Dr. Chen
 
Dr. Chen,

Taking this week's inventory data at face value, wouldn't you say it was bearish? Crude way overshot expectations. Only distillates showed a big draw, which was clearly weather related and hence transitory. I was confused by the market's reaction. Do you think it was driven by the GDP or Fed data or was it a question of shorts getting wrong-footed?
 
Quote from AAAintheBeltway:

Dr. Chen,

Taking this week's inventory data at face value, wouldn't you say it was bearish? Crude way overshot expectations. Only distillates showed a big draw, which was clearly weather related and hence transitory. I was confused by the market's reaction. Do you think it was driven by the GDP or Fed data or was it a question of shorts getting wrong-footed?
More...

I will respond to each of two your questions by quoting words from previous Crude Oil Market Analyses.

First, were the inventory data bearish?

The data were clearly bearish.

Before the data were released, COMA forecast on Jan. 30 that “the crude inventory will build by 2.0 million barrels rather than the Wall Street forecast of 1.2-1.5 million barrels,” that “the gasoline inventory will increase 2.0 million barrels rather than the Wall Street forecast of 1.4-1.6 million barrels,” and predicted a distillate inventory draw of “2.4 million barrels, which is within the Wall Street forecast of 2.1-2.6 million barrels.”

The data released on Jan. 31 showed that both the crude inventory and the gasoline inventory increased more than the forecasts, while the draw in distillate inventory fell into the forecast range. The market reacted accordingly by dropping to as low as $55.75 from $56.40 before the release.

Moreover, in anticipation of such bearish data, COMA placed a limit order to get short at $57.20 with a buy stop at $58.20.

To answer your first question succinctly, yes, the data were bearish.

Secondly, was the rally driven by the promising GDP data or Federal Reserve announcement or by short-covering?

In short, by all of them, with the cold weather forming the foundation of the rally starting on Jan. 18.

Also on Jan. 31, the GDP growth of 3.5% annual rate in the last quarter of 2006 washed out the effect of bearish inventory data, and then later in the day just as the market was going to close, the Federal Reserve announcement tipped the balance of forces and gave the bulls a lift to above $58.00. Then on Feb. 2 the fact that the market traded to a low of $57.05 but held above $57.00 further emboldened the bulls. Once the market finally broke $58.00 amidst concerns for a possible strike in Nigeria, the shorts relented, resulting in the market rally of $1.60 in the last hour of trading to close at $59.02.

All these factors contributed to the rally, but at different times. (For example, the shorts were not rushing in to cover until Feb. 2.)

Dr. Chen
 
Where do you see upside resistance? It looks like 60 will be here by day's end, so I'm wondering where you anticipate the market to encounter resistance as we rally...

Also, do you do natural gas analysis? If so where can I find it?
 
Quote from PJKIII:

Where do you see upside resistance? It looks like 60 will be here by day's end, so I'm wondering where you anticipate the market to encounter resistance as we rally...

Also, do you do natural gas analysis? If so where can I find it?
More...

Let me respond to your questions by quoting the sentence from Crude Oil Market Analysis for Feb. 2.

“Technically, the very fact that the market closed above $59.00 indicates that the test and break of the psychologically significant, though not technically significant, $60.00 are imminent.”

Where is the resistance?

COMA was not able to forecast the resistance on Feb. 2. As soon as COMA is able to forecast the resistance AND articulate the underlying reasons, COMA will make the forecast. However, before COMA is able to articulate the underlying reasons for its forecast, it will not throw out a number first and then try to find reasons to justify it.

I do not do natural gas analysis.

Dr. Chen
 
Owing to certain matters that require my immediate attention, I will not write Crude Oil Market Analysis for approximately one week. I will resume writing as soon as possible.

Dr. Chen
 
Quote from DrChen:

Owing to certain matters that require my immediate attention, I will not write Crude Oil Market Analysis for approximately one week. I will resume writing as soon as possible.

Dr. Chen
More...

Hope all is well.

We look forward to your return.

AZD
 
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