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