Crude Oil Market Analysis (2/1/07)

Today’ market action followed yesterday’s forecast when COMA forecast that “technically, the market looks very bullish, as the market did not trade around the $57.00-$57.40 resistance but rapidly traded through the resistance to close above $58.00,” but that “fundamentally, the market’s supply and demand appear to be balanced, as the persistent cold weather will continue to draw down distillate inventory at a high rate, and the ample supply of petroleum stocks will meet the demand for the remainder of the winter in the absence of supply disruption.”

The market opened in pit trading almost unchanged at $58.17 and then fell to a low of $57.10 in the wake of smaller than expected natural gas draw last week. But once the market held at $57.10 above the support of $57.00, it was taken higher by the overall bullish sentiment to a high of $58.86. Once the market failed to break $59.00 toward $60.00, there the fundamentals of the market finally set in, especially given the fresh news of the bearish natural gas inventory. The market encountered a bout of profit-taking and fell more than $1.00 in the last half an hour of trading to close $0.84 lower at $57.30.

Not surprisingly, as COMA indicated on Jan. 31, since the fundamentals of the supply and demand give the market no direction, a market that trades purely on technical indicators is directionless.

In addition to the bearish natural gas inventory, another bearish news might be that Iran announced today that it produced 4.04 million barrels of oil per day in Jan., 300,000 barrels per day above its OPEC quota.

Fundamentally, COMA reiterates its forecast yesterday that “the market’s supply and demand appear to be balanced, as the persistent cold weather will continue to draw down distillate inventory at a high rate, and the ample supply of petroleum stocks will meet the demand for the remainder of the winter in the absence of supply disruption.”

Technically, the market needs to stay above $57.00 to maintain its bullish momentum toward $59.00 to test the psychologically significant, though not technically significant, level at $60.00.

Tomorrow if the market holds above $57.10, it will trade inside today’s range, as both the bulls and the bears will take a respite after four days of intense battle in which the bulls had the northern wind behind them and forced out many of the shorts who sold the rally last week.

Strategy: Sit tight.

Dr. Chen