Crude Oil Market Analysis (2/23/07)

Today no major news provided the market with a clear direction, so the market continued its trend and ended up by $0.19 to close at $61.14.

The market opened $0.30 higher at $61.25 and went up to break the resistance at $61.37-$61.62 to a high of $61.80 in the wake of the news of the shutdown of Teppco’s 240,000 barrels per day pipeline from the Gulf Coast to New York. But when the news broke out that the pipeline will resume operation this weekend, the market fell back to below Wednesday’s high of $60.63 to $60.50. Once the market held above $60.50, it gradually moved back up to close $0.19 higher at $61.14.

Fundamentally, the supply and demand of the market is balanced, as the petroleum stocks are sufficient to meet the demand for the remainder of the winter.
Obviously the crude oil stock is sufficient and should be bearish to crude price, but the flare-up of the Iranian nuclear issue in the wake of the IAEA’s report on Feb. 22 and the ensuing U.N. Security Council meeting on Feb. 26 will add a risk premium and provide a support for crude price.

Although the distillate stock showed a draw of 5.0 million barrels last week due to the cold weather, the draw is likely a delayed response to the cold weather in the past two weeks, as distillate stock showed only a draw of 3.1 million barrels the week before last week. The weather forecast calls for normal temperature in the U.S. Northeast for the remainder of Feb. and above-normal temperature in March. The moderation of the cold temperature will reverse the pattern of the very large draw of more than 4.7 million barrels per day in each of the last two weeks.

The draw of 3.0 million barrels of gasoline stock is mainly due to the drop of the refinery turnaround to 85.2%. However, the refinery turnaround will likely recover significantly next week, as the “crack spread” is $14.41, the highest since last August, based on today’s closing futures prices and will provide incentives to refineries to accelerate their maintenance.

Technically, the market looks bullish. The CFTC’s COT report shows that in the week when the market dropped from $59.85 to $58.85, the market went from a net short of 7,213 contracts to a net long of 7,862 contracts amidst a sharp decrease in open interest by 95,307 contracts, indicating that the market had perceived a bottom at $57.00 amidst short-covering. The fact that the market closed above $61.00 only two days after it first closed above $60.00 at $60.07 may also draw fresh longs to the market.

Strategy: Sit tight.

Dr. Chen

P.S. COMA will not necessarily be updated daily due to the time constraint of its author.