Crude Oil Market Analysis (2/2/07)

Today’s market action is no surprise given yesterday’s COMA forecast that “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.”

The market opened below $58.00 at $57.93 and then tested the support at $57.00 again but held at $57.05 at 10:30 a.m. From that point on, the market kept its bullish trend and broke yesterday’s high at $58.86 to close $1.72 higher at $59.02.

One bullish news is that Nigeria’s oil workers may start strike as early as next Monday. Another bullish news is that President Chavez threatens to nationalize four oil projects with the combined production of 600,000 barrels per day, even though the news was known yesterday when the market dropped by 83 cents.

It seems that the bears were skinned this week.

The CFTC’s COT report shows that for the week ending on Jan. 30, 2007, a day the market had the most increase of $2.92 since Sept. 15, 2006, the net short interest increased from 8,499 contracts to 14,342 contracts amidst an increase of 37,398 contracts in open interest. In other words, in a week when the market had a $1.95 increase, the shorts were coming in to sell the rally. This explains why today the market shot up by as much as $1.60 to $59.10 after failing to break support at $57.00.

Fundamentally, COMA reiterates its forecast on Jan. 31 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.” However, the market sentiment has changed since Jan. 31, as evidenced by the fact that the March contract increased by $1.72 while the Dec. 2008 contract increased by $1.90, indicating that the market has begun to place some premium on the geopolitical risk in the supply of oil. In contrast, on Jan. 23 when the market rallied $2.46, the most since Sept. 19, 2005 up until that time, in the wake of Secretary Bodman's announcement of the doubling of the SPR in 20 years, although the March 2007 contract rallied by $2.46, the contract for December 2012, when the U.S. still needs to fill its SPR, rose only a nominal $0.89.

Technically, the very fact that the market closed above $59.00 indicates that the test and break of the psychologically significant, though not technically significant, $60.00 is imminent.

Strategy: Sit tight.

Dr. Chen