Crude Oil Market Analysis (4/10/07)

Today’s market was uneventful. The market held above yesterday’s low at $61.35 and slowly drifted upwards but could not break $62.30, the lows of March 26 and March 27 just before the market spiked to $68.09, and traded in a $0.93 range before settling $0.38 higher at $61.89.

Yesterday the market sold off by $2.77 despite the close of the European market. The $2.77 drop eclipsed the $2.75 drop on Jan. 3 and became the biggest one-day sell-off in dollar amount since Aug. 2005. Although analysts have attributed the sell-off to the delayed reaction to the release of British servicemen (including one woman) and the rollover of the Goldman Sacks Commodity Index, COMA would attribute the sell-off mostly to the unique situation in Cushing, Oklahoma where the storage facilities for West Texas Crude are about to reach their capacities, because the “delayed reaction” theory does not explain the high premium Brent Crude has over West Texas Crude--$5.53 as of today. Adding to the frenzied sell-off was long liquidation after a week in which the net longs increased by 26,496 contracts to a total of 66,675 contracts amidst an increase of 27,574 contracts in open interest when the market rose by $1.71.

Fundamentally, Iran’s continued defiance on the U.N.’s demand for its compliance of its nuclear program by announcing that it is aiming to install 50,000 centrifuges to enrich uranium and the ongoing unscheduled maintenance of many refineries, including BP’s 410,000 barrels per day refinery in Whiting, Indiana, Exxon Mobile’s 563,000 barrels per day refinery in Baytown, Texas, and Valero’s 158,000 barrels per day refinery in recovery from fire, all add support to the crude oil market. In addition, as the EIA pointed out today in its monthly Short Term Energy Outlook, the prospective limited gasoline supply this summer from importers due to their supplying other countries such as Iran, Nigeria, and Venezuela will also support the product market.

Technically, the market faces weak support at $61.35 and then a major support at $60.13. Resistance is at $63.75-$64.00.

In tomorrow’s DOE report the refinery input is likely to increase slightly to about 15.0 million barrels per day while the import drops below 10.0 million barrels per day, leaving a modest inventory build of 0.5-1.8 million barrels.

Gasoline production will recover to below 9.0 million barrels per day, as the crack spread has reached $23.54 today, the highest since Sept. 28, 2005. Import will likely increase to 1.1 million barrels per day while demand drops to $9.4 million barrels per day, leaving a draw of 1.5 million barrels, in line with the Wall Street forecast of a draw of 1.2-1.5 million barrels.

Distillate production will remain flat at 4.1 million barrels per day while import drops to just above 300,000 barrels per day. The demand will increase to just below 4.4 million barrels per day given the record low temperature last week, resulting an inventory draw of 2.8 million barrels, much larger than the Wall Street forecast of a draw of 900,000 barrels.

Overall, tomorrow’s DOE report should be supportive, and the market risk remains on the upside.

Strategy: Buy at $60.35 with a stop at $59.30.

Dr. Chen