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