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