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

Crude Oil Market Analysis (1/30/07)

Today’s market action followed yesterday’s forecast when the Crude Oil Market Analysis forecast that “fundamentally, the market is still buoyed by the cold weather in the short term, so the market risk remains slightly on the upside,” and that “technically, the market needs to hold above $53.00-$53.35 to gather the momentum to have another shot at above $56.00 to test the $57.00-$57.40 resistance.”

The market held above $53.35 overnight at a low of $53.82 and rose steadily during the course of the day to a high of $57.05, within the forecast range of resistance at $57.00-$57.40, before closing $2.96 higher at $56.97.

As COMA stated on Jan. 23, the market “has little direction,” and then on Jan. 29, “any news can cause the market to swing one way, only to be undone the other way by different news later on.”

The $2.96 rally may be attributed to the bullish news that Saudi Arabia plans to trim output by an additional 158,000 barrels a day starting Feb. 1, even though the news was already known yesterday when the market fell by $1.41. Another bullish news is that the Conference Board's consumer confidence index rose from a revised 110 in Dec. to 110.3 in Jan. to the highest in more than four years since May 2002, even though the increase is by 0.3.

Two other news items, however, are indeed supportive of the market’s bullish trend. One on the supply side is that the oil production at Cantarell--the world's second-biggest oil field in terms of output—fell from 1.99 million barrels per day in Jan. to 1.5 million barrels per day in Dec. last year. As a result, Mexico’s oil production fell from almost 3.4 million barrels per day in Jan. to below 3.0 million barrels per day in December, the lowest rate of oil output since 2000. The other on the demand side is that China has increased the rate of building its stockpile from 70,000 barrels per day in August to 200,000 barrels per day in the past three months, showing that the U.S. is not the only country in the world that takes crude oil supply off the market for its reserve.

Tomorrow’s DOE report is unlikely to alter the current market state of directionless.

The refinery input will continue to drop from 14.9 million barrels per day to 14.7 million barrels per day due to continued refinery maintenance. Crude import, which is notoriously difficult to forecast, probably recover from last week’s 9.8 million barrels per day. If the crude import rises above 10.0 million barrels per day, the crude inventory will build by 2.0 million barrels rather than the Wall Street forecast of 1.2-1.5 million barrels.

Gasoline production will fall slightly from 9.1 million barrels per day to 9.0 million barrels per day due to refinery turnaround. However, the slight decrease in production will be compensated by an increase in import from 911,000 barrels per day to close to 1.1 million barrels per day. As demand remains steady at 9.0 million barrels per day, gasoline inventory will increase 2.0 million barrels rather than the Wall Street forecast of 1.4-1.6 million barrels.

Distillate production will be steady at 3.9 million barrels per day while import will maintain above 450,000 barrels per day. The demand will increase from last week’s 4.0 million barrels per day to 4.3 million barrels per day due to the cold weather, resulting in an inventory draw of 2.4 million barrels, which is within the Wall Street forecast of 2.1-2.6 million barrels.

Fundamentally, the market is still buoyed by the cold weather and the impending OPEC production cut in the next two weeks.

Technically, the market is near the resistance at $57.00-$57.40 and will face stiff resistance at $57.40-$57.50, so the market risk is on the downside.

Strategy: Sell at $57.20 with a stop at $58.20, take profit below $51.50.

Dr. Chen

Crude Oil Market Analysis (1/29/07)

Today’s market action followed Jan. 29’s Crude Oil Market Analysis when it forecast that “fundamentally, the market risk remains on the upside,” but that “technically, the market looks very weak.”

The market opened Sunday higher and reached an overnight high of $55.95 but could not break $56.00 and steadily fell during the course of the day to close $1.41 lower at $54.01.

The bearish news includes (1) that the Saudi Ambassador to the U.S. called the current oil price “adequate” for both oil-producing countries and oil-consuming countries, and (2) that the National Weather Service forecast that the temperature will gradually rise from below-normal in early February to normal and above-normal from mid-February to March.

As COMA stated on Jan. 23, in the short term the market “has little direction.” Thus any news can cause the market to swing one way, only to be undone the other way by different news later on, as the market has shown since COMA made the forecast on Jan. 23.

Fundamentally, the market is still buoyed by the cold weather in the short term, so the market risk remains slightly on the upside.

Technically, the market needs to hold above $53.00-$53.35 to gather the momentum to have another shot at above $56.00 to test the $57.00-$57.40 resistance.

Strategy: Buy at $53.35 with a stop at $51.85, take profit above $57.50. Sell at $57.20 with a stop at $58.20, take profit below $51.00.

Dr. Chen

Crude Oil Market Analysis (1/26/07)

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.

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

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

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."

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 is 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

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 (1/23/07)

“I have yet begun to fight.” –John Paul Jones

Today is another day of heavy fighting between the bulls and the bears. As Crude Oil Market Analysis (“COMA”) observed on Jan. 19, “all these factors contribute to a battleground for the bulls and bears at $46.20-$54.86…. The sharp increase in open interests in the past two weeks explains the volatile market movement both intraday and during the two-week period. Likewise, when either the longs or the shorts decide to bail out, the market movement will be equally volatile.”

“Volatile it is, indeed.” Master Yoda would speak in this reverse fashion. Yesterday the market dropped from $54.65 to $52.07 for $2.58 in three hours. Today the market slowly rose from the overnight low of $52.41 and rallied from $53.64 to a high of $55.15 for $1.51 in the last half hour of trading before closing at $55.04, leaving the day’s range as $2.74.

Yesterday COMA forecast a downward market movement if the market would stay below $53.10 and a range-bound day if the market would stay above $53.10. But the COMA forecast was wrong. However, COMA offers no apology but only apologia because COMA could not have forecast that the U.S. Energy Secretary Samuel Bodman would make the announcement that the U.S. will expand its SPR by 1.5 billion barrels in the next 20 years—the market heard the “1.5 billion barrels” but not the “20 years”—by injecting 100,000 barrels per day to the SPR starting in the spring until the initial installment of 11 million barrels are added to the SPR. (If COMA had been able to make the forecast of the announcement, very soon the COMA would be published from a slammer.) After the announcement the market immediately jumped $1.51 in half an hour.

Yesterday the bulls initially pounded the bears until the bulls ran out of steam at $54.65, and then the bears beat back the bulls for $2.58. Today the bulls came back again—not with a vengeance because they themselves could only push the market to a high of $53.93. As COMA forecast on Jan. 19, “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Just as the bears were about to show the bulls the path to $50.00, Secretary Bodman became the bulls’ deus ex machina as the final arbiter of the market and gave the market just a little push to above $54.00. Once the market went above $54.00, the bears finally relented and retreated. The ensuing short-covering rally resulted in a one-day gain of $2.46, the biggest one-day gain since Sept. 19, 2005 when the market rallied $4.39 in one day.

Although 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,” today’s market rally has little implication by itself.

Today’s rally is mostly technically driven triggered by an event that has little fundamental basis. Today’s market is technically driven because as COMA observed on Jan. 19, when the new longs are coming in while the old shorts refuse to give in, once the dam breaks, in either direction, the flood will run further than it would do from a natural lake.

However, the event that triggered the dam breaking has little fundamental backup. First of all, the DOE will take away only 100,000 barrels per day from the market, which is less than 0.5% of the daily U.S. demand, and this quantity of oil can be easily supplied by the U.S. ally Saudi Arabia, now that Saudi Arabia has more spare capacity than before as it implements production cut. And the market knows this, as reflected by the fact that 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. Politically, as the campaign for the 2008 presidential election gets under way, the Administration, which includes the DOE, will be very sensitive about antagonizing voters with gasoline price hike caused by rising oil prices.

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.

Tomorrow’s DOE report also becomes difficult to forecast.
Crude oil’s refinery input will likely continue to drop to 14.9 million barrels per day as refineries continue to shut down for maintenance. The crude import will drop from last week’s 11.1 million barrels per day to 10.0-10.5 million barrels per day, but this is a big range that may result in a crude build of 0.2-3.5 million barrels. Such a forecast has no meaning.

Gasoline production will also drop from 9.1 million barrels per day to 8.9 million barrels per day due to the reduced refinery turnaround. Such a drop will be matched by a drop in demand from 9.06 million barrels per day to below 9.0 million barrels per day as motorists are snowed in by the bad weather. Whether or not gasoline stock will build depends on the import level, which is difficult to forecast. If the import stays above 1.0 million barrels per day as it has been in the last two weeks, the gasoline stock will likely build by the Wall Street estimated 1.2-1.5 million barrels.

Distillate production will also drop from last weeks 4.0 million barrels per day to 3.9 million barrels per day due to refinery turnaround. Such a drop will be compensated by a rebound in import from last week’s 277,000 barrels per day to a more seasonal level of over 350,000 barrels per day. Demand will pick up from last week’s 3.98 million barrels per day to above 4.1 million barrels per day due to the cold weather. Thus, the overall net effect on distillate stock will be a draw, but the quantity depends on how much the increased import can compensate the reduced production and increased demand.

Yesterday’s COMA already expressed some vague concern that the market may start to rebound, as it stated the opinion that “it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.” As a result, COMA moved down the stop price by 85 cents from $55.05 to $54.20. As today’s market action demonstrated, once the market touched $54.20, it went on to rally another 95 cents and never dropped back.

Result of previous trade: Short at $53.80 established on Jan. 22 was stopped out at $54.20 for a $0.40 loss.

Strategy: Sit tight until the release of the DOE report.

Dr. Chen

Crude Oil Market Analysis (1/22/07)

Today’s market action followed earlier forecasts.

COMA on Jan. 19 forecast that “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Also in response to a reader’s question overnight about the market action after the pit trading would later begin, COMA stated overnight that “the market overall looks weak so far since opening,” and that “the market action since opening shows a lack of momentum needed to trade above $54.85.”

The market rode Friday’s momentum at the opening of pit trading to open at $53.82, but since it lacked the momentum to trade above $54.85, it topped out at $54.65 and fell precipitously for $2.58 to a low of $52.07 before recovering some ground to close at $52.58.

Today’s market is nothing more than the bulls and bears again battling for positions. The bulls tried to ride Friday’s momentum with the north wind on their back to try to push above $54.85. Once they failed, the bears launched their broadside and depressed the market by more than $2.50.

Fundamentally, the market is slightly above its equilibrium, so a potential big move in either direction is unlikely, but the market risk remains on the downside.

Technically, 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.

Strategy: Jan. 19’s strategy to sell at $53.80 (with a stop at $55.05) was filled today, stop out at $54.20, take profit at $50.30.

Dr. Chen

Crude Oil Market Analysis (1/19/07)

Today’s market followed yesterday’s forecast that the market would begin to be range-bound despite having set a new low for each of the previous eight consecutive sessions, and the market had a sharp rebound.

The market moved in one direction from the overnight low of $51.48 to close at $53.40 for a $1.59 gain.

Currently the market is still very dynamic, as speculators play an “I-dare-you” game.

Fundamentally the market remains weak. The IEA reported on Jan. 18 that the oil demand in the 30-member OECD countries in 2006 fell for the first time in 20 years by a nominally insignificant 0.6%; however, the demand indeed decreased in 2006 in response to the record-high oil price. Oil demand in developed countries, however inelastic, finally responded to high prices when the price reached above $70 as oil consumers began to seek alternative sources of energy such as ethanol.

In addition, the IMF forecasts that Nigeria will spend $1.25 billion improving the oil-rich Niger River Delta in the run-up to April’s presidential election. Such spending will ease the tension in the region and bring Nigeria’s crude oil production from 2.35 million barrels per day in 2006 to 2.53 million barrels per day in 2007.

However, the demand decrease in the wake of $70 oil price may be transient, as oil consumers’ behavior will return to the old habit at a time when the oil price has gone back to $50. Moreover, with oil at $50 and corn price near record high the production of ethanol becomes unprofitable and provides a disincentive to provide an alternative source of energy. In other words, the rationales for shorting the market at $70 are no longer viable once the market falls to $50.

Moreover, the economy stays healthy, as the core CPI increased by a modest 0.2% in December, and the preliminary reading of the Univ. of Michigan Consumer Sentiment Index for Jan. rises from December’s to 81.3 to 98, the highest since the 103.2 reading in Jan. 2004.

All these factors contribute to a battleground for the bulls and bears at $46.20-$54.86. 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. In a matter of two weeks, the open interests have increased from 1,226,641 contracts to 1,317,380 contracts for a 7% increase. In other words, 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 sharp increase in open interests in the past two weeks explains the volatile market movement both intraday and during the two-week period. Likewise, when either the longs or the shorts decide to bail out, the market movement will be equally volatile.

Crude Oil Market Analysis’ observation of the increasing appetite by speculators in crude oil is contrary to the conventional wisdom that big speculators have shifted their money from energy and metal to agricultural products. Nevertheless, Crude Oil Market Analysis is concerned only with the fact, not with market perception, and the fact is that both the bulls and the bears are coming in, each holding firm their respective position.

Technically, despite today’s $1.59 rebound, it is too early to say that the market downward momentum has stopped. The market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term. If the market cannot stay above $54.00, it will again test and break the $50.00 support. The break of the $50.00 support is not an indication of any kind. What is telling about the market direction is whether there will be a follow-through. Here Crude Oil Market Analysis will quote an earlier analysis from Jan. 9 to end today’s analysis: “Today the market finally broke the 2006 low of $54.85 and had a follow-through selling of almost $1.00 to a low of $53.88. This $1.00 follow-through selling shows that the drop to $53.88 was not a normal panic selling triggered by stop-loss orders, but that there were new shorts coming in after the market broke the support. In other words, the market wanted to go lower.”

Strategy: Sell at $53.80 with a stop at $55.05; take profit below $51.00.

Dr. Chen

Crude Oil Market Analysis (1/18/07)

Today the market action followed yesterday’s Crude Oil Market Analysis’ forecast and became a pay day.

Crude Oil Market Analysis (1/9/07) predicted that “once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40” and thus recommended the strategy of getting short at $54.75. Thereafter, the daily Crude Oil Market Analysis has steadily moved down the stop-loss level from $56.35 to $55.65, $55.00, $53.70 and finally covered the short position today at $50.40 for a $4.35 profit.

Yesterday’s Crude Oil Market Analysis (the “COMA”) had a bearish bias but not as bearish as today’s market action turned out to be because the COMA could not forecast whether the crude oil import in today’s DOE report would exceed 10.0 million barrels per day. As it turned out, last week’s crude oil import of 11.1 million barrels per day largely contributed to the crude oil build of 6.8 million barrels.

Today the market opened at $52.30 in pit trading but dropped to $50.05 once the DOE report was released. The market never regained any strength and closed at $50.48 after briefly dropping below the psychologically important $50.00.

Fundamentally the market remains weak, but not so much because of the DOE report. The DOE report is not as bearish as it appears. First of all, the import of 11.1 million barrels per day last week is a one-time event and will likely drop below 10.5 million barrels per day this week. A more bullish factor is the significant drop in refinery turnaround from 91.5% to 87.9%, foreboding a drop in gasoline and distillate production in the weeks to come. Today’s bearish news includes (1) Saudi Arabia’s spare production capacity will reach 3 million barrels per day in February after it implements its share of the 500,000 barrels per day cut, and (2) Exxon Mobile’s Sakhalin-1 project will reach its full 250,000 barrels per day in Feb.

Technically, the market remains weak, as the market has set a new 19-month low consecutively in each of the last eight trading sessions with $55.10, $53.88, $53.44, $51.80, $51.56, $50.53, $50.28, $49.90.

From now on the market will likely trade in a range between $49.35 and $54.85 because the winter demand combined with expected draw in gasoline and distillate inventory will likely provide a short-term support to the market. The market shows its reluctance to drop much further both yesterday when it (CLG7) rallied almost $2.00 from a low of $50.28 to close at $52.24 and today when the March crude (CLH7) held above $51.00 even though the Feb. crude (CLG7) dropped below $50.00. The March crude (CLH7) has a support at $50.70.

Result of previous trade: Short at $54.75 established on Jan. 9 was covered at $50.40 for a $4.35 profit.

Strategy: Buy March crude (CLH7) at $50.90 with a stop at $49.75; take profit above $53.50. Sell March crude (CLH7) at $53.85 with a stop at $55.00; take profit below $51.00.

Dr. Chen

Crude Oil Market Analysis (1/17/07)

Crude Oil Market Analysis (1/17/07)

Mea culpa!

The Crude Oil Market Analyses had called for “tak[ing] profit below $50.40 for three days from Jan. 10 to Jan. 12, but yesterday’s Crude Oil Market Analysis called for ‘tak[ing] profit at $50.20.” Today’s market low was $50.28. The last eight cents turned out to be the most expensive eight cents in the current trade!

As Crude Oil Market Analysis forecast yesterday that “tomorrow if the market cannot stay above Friday’s low of $51.56, it will be again under pressure to test $50.00,” the overnight high was $51.63. Since the market could not stay above $51.56, it was under pressure to test the psychological support at $50.00 and dropped to a low of $50.28 after Saudi Arabia oil minister al-Naimi said that Saudi Arabia will continue its expansion in oil exploration. However, once the market found support near $50.00 and could not break it, it staged a sharp rally of nearly $2.00 to close at $52.24.

Fundamentally the market remains weak. Tomorrow’s IEA report will likely state that OPEC has cut far less production in December than its announced target of 1.2 million barrels per day, a point echoed today by Petrologistics report that OPEC’s Jan. production will be 27.1 million barrels per day excluding Iraq, 800,000 barrels per day more than its target of 26.3 million barrels per day.

Adding to the pressure will be tomorrow’s DOE inventory report, which will likely show continued build in gasoline and distillate stocks. Despite the likely drop in refinery input due to maintenance for spring operation, crude oil inventory is unlikely to build unless crude oil import, which is notoriously difficult to predict, exceeds 10.0 million barrels per day. Although gasoline production will likely decrease due to reduced refinery turnaround, the inventory will likely build around the Wall Street forecast of 2.2-2.6 million barrels due to the sharp drop in demand to slightly above 9.0 million barrels per day from last week’s 9.201 million barrels per day after the holidays. Distillate inventory will have a gain of around 2.2 million barrels rather than the Wall Street forecast of 1.2-1.5 million barrels due to rebound in demand to just above 4.1 million barrels per day from last week’s 3.979 million barrels per day. Barring any surprises in the continued below-average crude oil import, the market risk remains on the downside.

Technically, the market remains weak, as the market has set a new 19-month low in each of the last seven trading sessions with $55.10, $53.88, $53.44, $51.80, $51.56, $50.53, $50.28. The market needs to trade above $53.55 to rally toward $55.00.

Strategy: Hold short at $54.75 with a stop at $53.70; take profit at $50.40.

Dr. Chen

Crude Oil Market Analysis (1/16/07)

Today the market resumed its downward trend after staging a short-covering rally on Friday before the three-day weekend.

Overnight the market tried to rally above Monday’s high of $53.55 on the expectation of an OPEC announcement to support the market but failed at $53.19 once the news broke out that Saudi Arabia oil minister Ali al-Naimi rejected the idea of another OPEC cut. The market opened in New York at $52.33, but once it failed to stay above the overnight low of $52.32, it resumed its downward trend. The downward move picked up momentum after the market broke the previous 19-month low of $51.56 set last Friday to drop more than $1.00 to a low of $50.53 before staging a modest short-covering rally to close at $51.21.

Today’s main market fodder is al-Naimi’s announcement that rejected the idea of another OPEC cut before the cut of 500,000 barrels per day is implemented on Feb. 1. This reflects the Saudis’ frustration with the other members of the OPEC for their non-compliance with their respective quotas and sends out a clear signal that Saudi Arabia will not alone share the burden of shoring up the plunging oil price. Another fringe benefit of the plunging oil price to the Saudis is that Saudi Arabia can afford to live with a lower oil price more than its regional rival Iran can, which makes Saudi Arabia less anxious than the other members of the OPEC to announce a third round of production cut.

The market fundamental remains weak, and this weakness is further aided today by al-Naimi’s comments. However, al-Naimi correctly observed that the oversupply of crude oil in the market will soon be mopped up as the OPEC continues to implement its production cut. Therefore, $50.00 is approximately the market’s near-term bottom.

Technically, the market remains very weak, as the market has set a new 19-month low in each of the last six trading sessions with $55.10, $53.88, $53.44, $51.80, $51.56, $50.53 (today’s session started on Sunday). The market will need to trade above $53.55 to rally towards $55.00 and face a psychologically important support at $50.00, although the technical support is at $49.35.

Tomorrow if the market cannot stay above Friday’s low of $51.56, it will be again under pressure to test $50.00 due to the expectation of gasoline and distillate stock build in Thursday’s DOE report. If the market can stay above $51.56, it will trade inside today’s range of $50.53-$53.55.

Strategy: Hold short at $54.75 with a stop at $53.70; take profit at $50.20.

Dr. Chen

Crude Oil Market Analysis (1/12/07)

Today the market action followed yesterday’s forecast. Yesterday’s forecast called for a technical bounce based mostly on the 14-day RSI being below 30.

Overnight the market bounced from yesterday’s closing price of $51.88 to a high of $52.94 but opened in pit trading lower at $52.20. Then the market bounced off the day’s low of $51.56 and steadily climbed up to break the early high of $52.94 to a high of $53.11 before settling at $52.99.

Today’s market bounce can be contributed to technical reasons, one being that yesterday the 14-day RSI had fallen below 30 to around 26 thus signaling a recovery soon, the other being that those shorts who came in later this week would want to take their profit and cover their positions before the three-day weekend due to the Martin Luther King holiday on Monday. The OPEC’s “consultation” among themselves about a possible emergency meeting (another in as many as three months?) also helped to assuage the overwhelmingly negative market sentiment a little. As a result, the market bounced back by $1.11.

However, although the front-month Feb. contract bounced back by $1.11, the contracts for the distance months of Dec. 2007 and Dec. 2008 bounced back by more modest 51 cents and 33 cents, respectively, indicating the market’s expectation of continued ease in the global supply of crude oil in the two years ahead.

Today CFTC’s COT report further confirmed the market’s bearish trend. The 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. In other words, all the money that was on the long side last year is now aggressively jumping in to the short side, further reinforcing the market’s bearish trend.

Nothing in the market fundamental has changed today, and nothing has emerged to convince the market that a bottom has been reached. To make the matter even worse to OPEC, if OPEC should announce a cut for the third time in as many as three months while still failing to accomplish the initial cut of 1.2 million barrels, the market will simply ignore the “wolf story” and continue the downward trend until….?

Strategy: Hold short at $54.75 with a stop at $55.00; take profit below $50.40.

Dr. Chen

Crude Oil Market Analysis (1/11/07)

Today the market continued its downward trend after another rally failed in the wake of OPEC’s appeal to its members to comply with their respective production reduction quotas.

The market reached another 19-month low overnight to hit $52.94 but rallied on OPEC’s appeal to its members to comply with their respective production reduction quotas. However, once it became clear that the market was unable to rally above the 2006 low of $54.85 in light of the estimate by Oil Movements that OPEC production will increase by 350,000 barrels per day in Jan. from its Dec. productions, the market continued its downward trend to hit another 19-month low at $51.80 before closing at $51.88.

Today’s market action is consistent with the Jan. 9 Crude Oil Market Analysis that “once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40.” This point is echoed by Barclay’s technician Philip Roberts in London, who said that “a pivotal moment in oil's decline so far this month is its passage through $55, and subsequently the lows of 2006, implying further near-term weakness.”

Fundamentally the market is very weak and shows no sign of bottoming out. Technically, however, the 14-day RSI for the Feb. contract is currently below 30, which indicates that the market is oversold.

Currently the market trades 83-cent higher at $52.71. The bounce is not alarming to the bears, since the market dropped rapidly to $51.80 after breaking $52.94 and has not traded in the $51.80-$53.00 range before.

Tomorrow will be an inside range day. The market will trade between $51.80 and $53.90, as some shorts cover to take profit.

Strategy: Hold short at $54.75 with a stop at $55.00 in case the market rallies above 2006 low of $54.85; take profit below $50.40.

Dr. Chen

Crude Oil Market Analysis (1/10/07)

Today the market action followed the forecast of the Crude Oil Market Analysis (1/09/07) (the “Jan. 9 COMA”).

The Jan. 9 COMA stated that “overall in tomorrow’s DOE report, unless the crude import falls to 9.5 million barrels per day or lower, the continued build in gasoline and distillate stocks will more than offset the draw in crude oil stocks and pressure the crude oil market towards $55.00. Once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40.”

The Jan. 9 COMA called for the effect of a significant build in product stock to offset the effect of a large draw in crude stock. Today the market heeded the gasoline build of 3.8 million barrels and distillate build of 5.4 million barrels while shrugging off crude draw of 5.0 million barrels.

The Jan. 9 COMA also called a crude import at 9.5 million barrels or below as the saving grace for the market’s continued downward trend. After the initial reaction to the DOE report, the market did bounce off from $53.89, one cent above the Jan. 9 low and an 18-month low of $53.88, as the market was mindful of the crude draw of 5.0 million barrels. But as soon as it became clear that the market could not rally above $54.85, the 2006 low, the market continued its downward trend and settled at $54.02.

Currently the market trades at $53.22 after reaching a low of $52.94. This is not surprising as the Jan. 9 COMA called for “a free fall” if the market would drop to $54.70.

Fundamentally, without a prolonged cold weather arriving by Feb. the market is slightly off balance at $53.22 with a downside risk towards $50.00.

So far no news can be substantively interpreted as bullish. On Jan. 9 Qatar’s oil minister’s talk of an early implementation of the 500,000 barrels per day cut failed to sustain a market rally from an 18-month low. The dispute between Belarus and Russia that first gave the market a boost on Jan. 8 has since been resolved between the two countries’ presidents.

Today Saudi Arabia announced cut in Feb. oil allocations to its Asian customers in China, Japan, and South Korea by 12%-14%, larger than the contractual limit of 10%. However, just as Saudi Arabia could not help bring down the oil price last July because the world did not need its sour crude, now Saudi Arabia cannot boost the oil price because its cut to its Asian customers is also mostly sour crude. Moreover, Saudi Arabia has announced no change in allocation to its U.S. customers.

It appears that Saudi Arabia is the only OPEC member who truly implements its share of OPEC’s announced cut. As the market drops below $55.00, instead of cutting productions now, most other members of the OPEC will likely increase productions—or at least keep productions steady. Based on game theory, if one member thinks that all the other members will be serious about cutting oil productions only if the price falls below $50.00, and every member except Saudi Arabia has the same strategic thinking, as the market falls below $55.00, it is the “catch-the-last-train” mentality because every member except Saudi Arabia will try to sell as much oil as possible while the price is still above $50.00 before they all recognize that at $50.00 per barrel or below they all have to cut productions in real term or they all will sink. Therefore, as the market trades below $55.00, it is unlikely that OPEC members will truly cut productions until the market falls below $50.00.

The OPEC production cut is the only potential bullish factor in sight, and it is not credible until the market drops to $50.00 or below.

Technically speaking, there may be a rather strong support at $52.50, as the market at $52.50 would have retraced by 38% from its high of $78.40 in the most recent bull market starting from 1998’s low at $10.32 to 2006’s high at $78.40.

Strategy: Hold short at $54.75 with a stop at $55.65; take profit below $50.40.

Dr. Chen

Crude Oil Market Analysis (1/9/07 p.m.)

Today the market is in a state of confusion, as it struggles to decide whether to bottom out at $55.00 or to break away towards $49.75.

Today the market finally broke the 2006 low of $54.85 and had a follow-through selling of almost $1.00 to a low of $53.88. This $1.00 follow-through selling shows that the drop to $53.88 was not a normal panic selling triggered by stop-loss orders, but that there were new shorts coming in after the market broke the support. In other words, the market wanted to go lower.

However, the market could not stay below the 2006 low of $54.85 and retraced back to the previous support above $55.00. Once the market retraced back above the previous support, the shorts who jumped in after the market broke the important $54.85 support ran for cover and pushed the market above the day’s high of $56.15 to a high of $56.20. Once the shorts covered, the market settled back down to $55.63 for a $0.45 loss for the day.

The market action would have clearly shown that the market had bottomed out at $55.00 if the rally back above $55.00 from $53.88 had been purely technically driven. However, the rally was event-driven, caused by the announcement by a minister of a member country of the OPEC—not even an official OPEC announcement--that OPEC will begin to implement the 500,000 barrels per day cut originally scheduled to start on Feb. 1 immediately. The 10 OPEC countries cut production by approximately 700,000 barrels per day in November 2006 out of the 1.2 million barrels per day they had announced in October. Then in December the 10 OPEC countries maintained the same production level according to the EIA, increased production by 100,000 barrels per day according to Petrologistics, and increased production by 75,000 barrels per day according to the Dow Jones survey. Given OPEC’s compliance record, after the initial knee-jerk reaction the market can hardly reverse its downward trend by OPEC’s unofficial talk.

Other than OPEC’s unofficial announcement, the other material information coming out today is EIA’s Short Term Energy Outlook. The Crude Oil Market Analysis for Jan. 8 predicted that “the EIA's Short-term Energy Outlook will likely lower its estimate of the 1Q WTI price and of the distillate oil demand due to the record-setting warmth so far this winter.” The EIA lowered its forecast for WTI price in 2007 to $64.42 from December’s forecast of $65.00. The EIA also lowered its forecast for the U.S. demand for crude oil in 1Q and 2007 by the same 0.6%. Due to the miniscule scale of EIA’s downward revision, the EIA’s Short Term Energy Outlook did not have any impact on the market.

Tomorrow’s DOE report will likely reinforce the market’s trend towards $50.00 primarily because of ample build in gasoline and distillate stocks.

First of all, refinery utilization rate will likely fall as refineries start maintenance after the New Year in preparation for spring operation. Whether crude stock will increase or decrease depends on the level of import, which is notoriously difficult to predict. The Bloomberg survey’s forecast of a draw of 1.5 million barrels is within the ballpark figure.

The gasoline import will likely drop from last week’s 1.254 million barrels per day to a more seasonal 1.0 million barrels per day, but such a drop will be matched by a drop in demand to just below 9.1 million barrels per day after the holiday season ends. As a result, the Bloomberg survey’s forecast of a draw of 2.6 million barrels and Reuters survey’s forecast of a draw of 2.3 million barrels are within the ballpark figure.

The distillate import will likely edge up a little to above 400,000 barrels per day from last week’s 385,000 barrels per day, and the demand will likely fall to just above 4.0 million barrels per day due to the record-setting warmth in the East Coast. As a result, the distillate build will likely be approximately 3.0 million barrels rather than 2.0 million barrels forecast by Bloomberg survey and 2.1 million barrels forecast by Reuters survey.

Overall in tomorrow’s DOE report, unless the crude import falls to 9.5 million barrels per day or lower, the continued build in gasoline and distillate stocks will more than offset the draw in crude oil stocks and pressure the crude oil market towards $55.00. Once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40.

On the up side, the market needs to trade above $56.20 in order to break away from the magnetic force of $55.00 that holds the market towards $55.00.

Result of previous trade: Long established on Jan. 8 at $55.70 was stopped out today at $54.40 for a $1.30 loss.

Strategy: Hold short at $54.75 with a stop at $56.35, take profit below $50.50.

Dr. Chen

Crude Oil Market Analysis (1/9/07 a.m.)

Now that the market has convincingly broken $55.00 support to a low of $53.88, sell short at market currently at $54.75 with a buy stop at $56.25, take profit at $50.50 or below. I will provide a full analsysis at the end of day.

Dr. Chen

Crude Oil Market Analysis (1/8/07)

Today the market traded in a $2.62 range between $57.72 and $55.10 only to close 22 cents lower at $56.09 because the market, on an intra-day basis, has no directions.

Other than the geopolitical tensions--today it was Belarus--and the OPEC jawboning that the Jan. 6 commentary already discussed, the only new material information appearing today is the CFTC's COT report. The COT report reflects the market sentiment that displays a serious warning to anyone who dares to be long in the crude oil market because it shows that during the week from Dec. 26 to Jan. 3 in which the market dropped $2.78 to close at $58.32, the non-commercial longs have shrunk by 17,654 contracts to just 2,194 contracts amidst aggressive new shorts coming in as open interest increased by 46,748 contracts. The market has since dropped by another $2.23 to close today at $56.09. It is a fairly accurate statement to say that by the end of today the non-commercial interests are net short.

Today the market tried to break $55.00 support, but it seems that all the longs that should have been out have already been flushed out after last Wed.'s $58.32 closing, and all the shorts that should have been in have already jumped in the bandwagon since the market broke $60.00 support last Wed., so no new shorts were coming in as the market approached $55.00. Therefore, the market held firm at $55.10 and closed nearly $1.00 higher at $56.09.

The front-month crude oil contract held above $57.30 in the entire month of October except on the date of expiration on Oct. 20. Therefore, $57.30-$57.50 was an important support and is now a resistance. The market now needs to close above $57.50 in order to rally back to $60.00.

Tomorrow the market will again under pressure for two reasons. First, gasoline and distillate inventories are expected to build in Wed.'s DOE report. Also, the EIA's Short-term Energy Outlook will likely lower its estimate of the 1Q WTI price and of the distillate oil demand due to the record-setting warmth so far this winter.

Strategy: Hold long at $55.70 with a stop at $54.40; take profit above $59.50.

Dr. Chen

Crude Oil Market Analysis (1/6/07)

From January 6, 2007 I will begin to post my analysis of the crude oil futures market traded on the New York Mercantile Exchange. The posting will be made on an "as-necessary" basis.

On Fri., Jan. 5 the crude oil futures market clearly ran into a strong support at $55.00 and closed at $56.31, $1.41 higher than the day's low of $54.90. The weekly continuation chart for the front-month crude oil futures shows that the market has been holding above $55.00-$55.50 support fairly well since the week ending on July 1, 2005. The market will hold above $55.00-$55.50 support again this time even though the market sold off on Wed. and Thurs. for a $5.48 loss for the biggest two-day drop since the $5.88 drop on Dec. 1 and Dec. 2 of 2004 as if today were sometime in March with the winter already behind. But the winter will arrive, and the market will rally on the forecast of any cold weather arrival. Moreover, the geopolitical tensions in Iran, Nigeria, Iraq have shown no sign of abating. These geopolitical tensions along with OPEC's proclaimed 500,000 barrel per day production cut to be implemented on Feb. 1, however incredible it may be perceived by the market, will provide support for the market at $55.00.

In the near term the market will again trade sideways as it did between Nov. 28 and Dec. 22 at $60.50-$64.50, except that the market will trade in the range of $55.00-$60.00.

Strategy: Long at $55.70 or below with a stop at $54.40; take profit at $59.50 or above. (Maximum risk $1.30, minimum expected profit $3.80).

Dr. Chen