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