Crude Oil Market Analysis (1/30/07)

Today’s market action followed yesterday’s forecast when the Crude Oil Market Analysis forecast that “fundamentally, the market is still buoyed by the cold weather in the short term, so the market risk remains slightly on the upside,” and that “technically, the market needs to hold above $53.00-$53.35 to gather the momentum to have another shot at above $56.00 to test the $57.00-$57.40 resistance.”

The market held above $53.35 overnight at a low of $53.82 and rose steadily during the course of the day to a high of $57.05, within the forecast range of resistance at $57.00-$57.40, before closing $2.96 higher at $56.97.

As COMA stated on Jan. 23, the market “has little direction,” and then on Jan. 29, “any news can cause the market to swing one way, only to be undone the other way by different news later on.”

The $2.96 rally may be attributed to the bullish news that Saudi Arabia plans to trim output by an additional 158,000 barrels a day starting Feb. 1, even though the news was already known yesterday when the market fell by $1.41. Another bullish news is that the Conference Board's consumer confidence index rose from a revised 110 in Dec. to 110.3 in Jan. to the highest in more than four years since May 2002, even though the increase is by 0.3.

Two other news items, however, are indeed supportive of the market’s bullish trend. One on the supply side is that the oil production at Cantarell--the world's second-biggest oil field in terms of output—fell from 1.99 million barrels per day in Jan. to 1.5 million barrels per day in Dec. last year. As a result, Mexico’s oil production fell from almost 3.4 million barrels per day in Jan. to below 3.0 million barrels per day in December, the lowest rate of oil output since 2000. The other on the demand side is that China has increased the rate of building its stockpile from 70,000 barrels per day in August to 200,000 barrels per day in the past three months, showing that the U.S. is not the only country in the world that takes crude oil supply off the market for its reserve.

Tomorrow’s DOE report is unlikely to alter the current market state of directionless.

The refinery input will continue to drop from 14.9 million barrels per day to 14.7 million barrels per day due to continued refinery maintenance. Crude import, which is notoriously difficult to forecast, probably recover from last week’s 9.8 million barrels per day. If the crude import rises above 10.0 million barrels per day, the crude inventory will build by 2.0 million barrels rather than the Wall Street forecast of 1.2-1.5 million barrels.

Gasoline production will fall slightly from 9.1 million barrels per day to 9.0 million barrels per day due to refinery turnaround. However, the slight decrease in production will be compensated by an increase in import from 911,000 barrels per day to close to 1.1 million barrels per day. As demand remains steady at 9.0 million barrels per day, gasoline inventory will increase 2.0 million barrels rather than the Wall Street forecast of 1.4-1.6 million barrels.

Distillate production will be steady at 3.9 million barrels per day while import will maintain above 450,000 barrels per day. The demand will increase from last week’s 4.0 million barrels per day to 4.3 million barrels per day due to the cold weather, resulting in an inventory draw of 2.4 million barrels, which is within the Wall Street forecast of 2.1-2.6 million barrels.

Fundamentally, the market is still buoyed by the cold weather and the impending OPEC production cut in the next two weeks.

Technically, the market is near the resistance at $57.00-$57.40 and will face stiff resistance at $57.40-$57.50, so the market risk is on the downside.

Strategy: Sell at $57.20 with a stop at $58.20, take profit below $51.50.

Dr. Chen