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