Analysis:
The market initially did what yesterday's analysis predicted. As the Consumer Confidence Index did not slip below 50, and the Chicago PMI was marginally better than consensus forecast, the market did take off after 10 a.m. But the market's rise was checked when the FOMC meeting minute was released at 2 p.m. and finished the day flat. After the last seven trading days the Bears should feel tired, as the market stubbornly refused to follow any prodding to plunge below 1,040. Looking ahead to tomorrow, the PMI will likely surprise on the upside, which will prod the market higher, but any rise will be checked and partially offset by the Construction Spending release.
Strategy:
Hold long to reverse at 1,080
Tuesday, August 31, 2010
Monday, August 30, 2010
S&P 500 Index Analysis (8/30/2010)
Analysis:
True to previous day's analysis, the market built on Friday's gain to top 1,072 overnight before fading prior to the market open today. The conventional wisdom is that the market sold out on the news of a meager personal spending in July, but the sell-out seems to have been overdone, especially in light of the continuing wave of mergers which the market largely ignored today. Looking ahead tomorrow, barring the scenario of a dip of Consumer Confidence Index below 50, the Chicago PMI will likely surprise on the upside around 59, which will provide much needed confidence booster for the market to recoup all today's losses.
Strategy:
Hold long to reverse at 1,082
True to previous day's analysis, the market built on Friday's gain to top 1,072 overnight before fading prior to the market open today. The conventional wisdom is that the market sold out on the news of a meager personal spending in July, but the sell-out seems to have been overdone, especially in light of the continuing wave of mergers which the market largely ignored today. Looking ahead tomorrow, barring the scenario of a dip of Consumer Confidence Index below 50, the Chicago PMI will likely surprise on the upside around 59, which will provide much needed confidence booster for the market to recoup all today's losses.
Strategy:
Hold long to reverse at 1,082
Friday, August 27, 2010
S&P 500 Index Analysis (8/27/2010)
Analysis:
Today the S&P initially acted strangely, and it is most puzzling when it
dropped sharply after 10 a.m., perhaps having to do with Intel's ill-timed
announcement at 9:58 a.m. The better than expected downwardly revised Q2 GDP
to 1.6% provided a sound backdrop for the Bulls to start with, and Chairman
Bernanke's comments at 10 a.m. gave assurance to the much battered Bulls, so
the market never looked back after a brief swoon at 10 a.m. Now that the
market has bottomed out from the 1,040 area, it will continue to build on the
upward momentum on Monday.
Strategy:
Hold a long position with a limit order to reverse at 1,082
Today the S&P initially acted strangely, and it is most puzzling when it
dropped sharply after 10 a.m., perhaps having to do with Intel's ill-timed
announcement at 9:58 a.m. The better than expected downwardly revised Q2 GDP
to 1.6% provided a sound backdrop for the Bulls to start with, and Chairman
Bernanke's comments at 10 a.m. gave assurance to the much battered Bulls, so
the market never looked back after a brief swoon at 10 a.m. Now that the
market has bottomed out from the 1,040 area, it will continue to build on the
upward momentum on Monday.
Strategy:
Hold a long position with a limit order to reverse at 1,082
Thursday, April 12, 2007
Crude Oil Market Analysis (4/12/07)
Mea Culpa!
COMA was bullish and interpreted yesterday’s DOE report as “EXTREMELY bullish” and was seeking to enter the market on the long side by buying at a dip—at $60.40. As a result COMA focused on the forecast that today’s IEA report would revise down 2007 global oil demand--which was correct as the IEA revised down 2007 global demand by 250,000 barrels per day—but chose not to forecast that today’s IEA report would also warn a continued tightening of global oil supply due to OPEC production cut—from 26.77 million barrels per day in Feb. to 26.55 million barrels per day in March among the OPEC-10.
The market did not dip to provide a buying opportunity but instead took off on the bullish IEA report to break resistance at $62.30 and stayed comfortably above $62.50 until the news that ConocoPhillips shut several of its oil processing units in Wilmington, California gave the market another push in the last hour of trading to finish $1.84 higher at $63.85.
Fundamentally, the tightening of global oil supply leading up to the upcoming summer driving season and the uninterrupted refinery glitches will provide a solid support to the market.
Technically, now that the market trades above the resistance at $64.00, the gasoline’s breakaway from $2.1500 will lead the crude market to break away from $64.00 resistance until the gasoline market tests the next resistance at $2.2800.
Strategy: Buy at market at $64.12 with a stop at $63.15.
Dr. Chen
For the archive of Crude Oil Market Analyses, please visit http://energyfutures.blogspot.com/
COMA was bullish and interpreted yesterday’s DOE report as “EXTREMELY bullish” and was seeking to enter the market on the long side by buying at a dip—at $60.40. As a result COMA focused on the forecast that today’s IEA report would revise down 2007 global oil demand--which was correct as the IEA revised down 2007 global demand by 250,000 barrels per day—but chose not to forecast that today’s IEA report would also warn a continued tightening of global oil supply due to OPEC production cut—from 26.77 million barrels per day in Feb. to 26.55 million barrels per day in March among the OPEC-10.
The market did not dip to provide a buying opportunity but instead took off on the bullish IEA report to break resistance at $62.30 and stayed comfortably above $62.50 until the news that ConocoPhillips shut several of its oil processing units in Wilmington, California gave the market another push in the last hour of trading to finish $1.84 higher at $63.85.
Fundamentally, the tightening of global oil supply leading up to the upcoming summer driving season and the uninterrupted refinery glitches will provide a solid support to the market.
Technically, now that the market trades above the resistance at $64.00, the gasoline’s breakaway from $2.1500 will lead the crude market to break away from $64.00 resistance until the gasoline market tests the next resistance at $2.2800.
Strategy: Buy at market at $64.12 with a stop at $63.15.
Dr. Chen
For the archive of Crude Oil Market Analyses, please visit http://energyfutures.blogspot.com/
Wednesday, April 11, 2007
Crude Oil Market Analysis (4/11/07)
Today’s market is “much ado about nothing.”
Today’s market followed yesterday’s forecast that “tomorrow’s DOE report should be supportive, and the market risk remains on the upside.”
Refinery input of crude oil was 15.1 million barrels per day, in line with COMA forecast of 15.0 million barrels per day, and was the first time it reached above 15.0 million barrels per day since Jan. 12, 2007. Crude oil import fell to 9.8 million barrels per day, in line with COMA forecast of a drop “below 10.0 million barrels per day.” The crude build of 0.7 million barrels falls within the COMA forecast range of a build of 0.5-1.8 million barrels.
Despite the increase in refinery turnaround to 88.4%, gasoline production fell to 8.5 million barrels per day, the lowest output since Oct. 7, 2005 after Hurricane Katrina. Import also fell to 953,000 barrels per day, resulting in a draw of 5.5 million barrels, the largest draw since Aug. 22, 2003, to 199.7 million barrels, the first time the inventory falls below 200.0 million barrels since Nov. 25, 2005.
The increased refinery turnaround did cause an increase in distillate production to 4.2 million barrels per day, slightly above COMA forecast of 4.1 million barrels per day. The drop in import to 259,000 barrels per day was larger than COMA’s forecast drop to “just above 300,000 barrels per day.” The record cold temperature in the Northeast did cause an increase in demand but only to 4.3 million barrels per day, less than COMA forecast of 4.4 million barrels per day. The result was an inventory build of 100,000 barrels instead of COMA forecast of a draw of 2.8 million barrels.
Today’s DOE report was EXTREMELY bullish, as the crude build was smaller than the Street forecasts, and gasoline draw was much larger than the Street forecasts. Gasoline did what was expected—jumping to $2.1700 after the report, but the jump in gasoline price did not impress the crude market, as the market could not stay above yesterday’s high of $62.28 after reaching a high of $62.56 and settled $0.12 higher at $62.01.
The market may have focused on the recovery in refinery turnaround and expect more products to be available when more refineries come back online. Two considerations may also have contributed to the market’s discount of the gasoline draw of 5.5 million barrels. One is that the draw of 5.5 million barrels may have been a technical necessity by refineries as they empty tanks of winter-grade gasoline for summer-grade gasoline, much as they did before May 2006 when they were switching product from MTBE to RBOB. A second consideration is that the consistent below-normal import level may soon end as the strike at French port has ended recently.
The failure of the crude market to stay above $62.28 despite the bullish report signals that the market wants to test the low at $61.35 again before rallying back to the mid-$60s.
Fundamentally, the supply of crude oil remains tight as refineries ramp up to produce more gasoline to meet record demand for the summer. As COMA briefly mentioned yesterday, the market is temporarily distorted by the bulging inventory in Cushing, Oklahoma of 27 million barrels, the highest level since record-keeping began in April 2004. The bulging inventory has caused the Brent crude premium to West Texas Intermediate to widen further today to $5.83 from yesterday’s $5.53. Once the inventory in Cushing begins to be drawn down, the market will move higher toward Brent price.
Technically, the market has difficulty to stay above $62.28 despite today’s bullish DOE report, so the market will break the low of April 9 and April 10 at $61.35 towards $60.13 support.
Tomorrow, the IEA’s monthly report will revise down the oil consumption growth for 2007 due to a slower growth in the world economy. If no bullish news springs the market to above $62.30, it will drop below $61.35 toward $60.13 support once all the stops are triggered at or below $61.00.
Strategy: Buy at $60.40 with a stop at $58.95.
Dr. Chen
For the archive of Crude Oil Market Analyses, please visit http://energyfutures.blogspot.com/
Today’s market followed yesterday’s forecast that “tomorrow’s DOE report should be supportive, and the market risk remains on the upside.”
Refinery input of crude oil was 15.1 million barrels per day, in line with COMA forecast of 15.0 million barrels per day, and was the first time it reached above 15.0 million barrels per day since Jan. 12, 2007. Crude oil import fell to 9.8 million barrels per day, in line with COMA forecast of a drop “below 10.0 million barrels per day.” The crude build of 0.7 million barrels falls within the COMA forecast range of a build of 0.5-1.8 million barrels.
Despite the increase in refinery turnaround to 88.4%, gasoline production fell to 8.5 million barrels per day, the lowest output since Oct. 7, 2005 after Hurricane Katrina. Import also fell to 953,000 barrels per day, resulting in a draw of 5.5 million barrels, the largest draw since Aug. 22, 2003, to 199.7 million barrels, the first time the inventory falls below 200.0 million barrels since Nov. 25, 2005.
The increased refinery turnaround did cause an increase in distillate production to 4.2 million barrels per day, slightly above COMA forecast of 4.1 million barrels per day. The drop in import to 259,000 barrels per day was larger than COMA’s forecast drop to “just above 300,000 barrels per day.” The record cold temperature in the Northeast did cause an increase in demand but only to 4.3 million barrels per day, less than COMA forecast of 4.4 million barrels per day. The result was an inventory build of 100,000 barrels instead of COMA forecast of a draw of 2.8 million barrels.
Today’s DOE report was EXTREMELY bullish, as the crude build was smaller than the Street forecasts, and gasoline draw was much larger than the Street forecasts. Gasoline did what was expected—jumping to $2.1700 after the report, but the jump in gasoline price did not impress the crude market, as the market could not stay above yesterday’s high of $62.28 after reaching a high of $62.56 and settled $0.12 higher at $62.01.
The market may have focused on the recovery in refinery turnaround and expect more products to be available when more refineries come back online. Two considerations may also have contributed to the market’s discount of the gasoline draw of 5.5 million barrels. One is that the draw of 5.5 million barrels may have been a technical necessity by refineries as they empty tanks of winter-grade gasoline for summer-grade gasoline, much as they did before May 2006 when they were switching product from MTBE to RBOB. A second consideration is that the consistent below-normal import level may soon end as the strike at French port has ended recently.
The failure of the crude market to stay above $62.28 despite the bullish report signals that the market wants to test the low at $61.35 again before rallying back to the mid-$60s.
Fundamentally, the supply of crude oil remains tight as refineries ramp up to produce more gasoline to meet record demand for the summer. As COMA briefly mentioned yesterday, the market is temporarily distorted by the bulging inventory in Cushing, Oklahoma of 27 million barrels, the highest level since record-keeping began in April 2004. The bulging inventory has caused the Brent crude premium to West Texas Intermediate to widen further today to $5.83 from yesterday’s $5.53. Once the inventory in Cushing begins to be drawn down, the market will move higher toward Brent price.
Technically, the market has difficulty to stay above $62.28 despite today’s bullish DOE report, so the market will break the low of April 9 and April 10 at $61.35 towards $60.13 support.
Tomorrow, the IEA’s monthly report will revise down the oil consumption growth for 2007 due to a slower growth in the world economy. If no bullish news springs the market to above $62.30, it will drop below $61.35 toward $60.13 support once all the stops are triggered at or below $61.00.
Strategy: Buy at $60.40 with a stop at $58.95.
Dr. Chen
For the archive of Crude Oil Market Analyses, please visit http://energyfutures.blogspot.com/
Tuesday, April 10, 2007
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
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
Friday, February 23, 2007
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.
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.
Monday, February 5, 2007
Announcement
Owing to certain matters that require my immediate attention, I will not write Crude Oil Market Analysis for approximately one week. I will resume writing as soon as possible.
Dr. Chen
Dr. Chen
Saturday, February 3, 2007
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
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
Thursday, February 1, 2007
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
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
Wednesday, January 31, 2007
Crude Oil Market Analysis (1/31/07)
Today is a déjà vu all over again.
On Jan. 24 Crude Oil Market Analysis stated, “the U.S. oil industry agrees with Crude Oil Market Analysis, but the market does not. As a result, COMA made the right forecast of the fundamentals but still lost money.” The same summary applies to COMA today.
The reported refinery input is 14.8 million barrels per day, slightly above COMA forecast of 14.7 million barrels per day. The reported import is 10.0 million barrels per day, in line with COMA forecast of a recovery in import. The resulting crude build of 2.7 million barrels is closer to COMA forecast of a build of 2.0 million barrels than the Wall Street forecast of a build of 1.2-1.5 million barrels.
The reported gasoline production is 9.1 million barrels per day, slightly above COMA forecast of 9.0 million barrels per day. The reported demand is 9.1 million barrels per day, slightly above COMA forecast of 9.0 million barrels per day. The reported import is 1.3 million barrels per day, above COMA forecast of an increase from 911,000 barrels per day to 1.1 million barrels per day. The gasoline build of 3.8 million barrels is closer to COMA forecast of a build of 2.0 million barrels than the Wall Street forecast of a build of 1.4-1.6 million barrels even though COMA underestimated the import level.
The reported distillate production is 4.0 million barrels per day, slightly above COMA forecast of 3.9 million barrels per day. The reported demand is 4.5 million barrels per day, above COMA forecast of 4.3 million barrels per day. The reported import is 364,000 barrels per day, lower than COMA forecast of over 450,000 barrels per day. The distillate draw of 2.6 million barrels is slightly above COMA forecast of a draw of 2.4 million barrels.
The market opened fairly uneventfully at $56.40. After the DOE report the market traded erratically between $55.75 and $57.80. In the last half an hour, perhaps due to the FOMC announcement, the market decided to break $58.00 to reach a high of $58.20 before closing six cents lower at $58.14. The two-day rally of $4.13 is the biggest two-day rally since Dec. 14 and Dec. 15 of 2004 when the market rallied by $3.18, but at a mathematically lower percentage.
One bullish news today is that the U.S. economy grew at a 3.5% annual rate in the last quarter of 2006 after growing at a 2.0% annual rate in the prior quarter. Another bullish news that may have caused the market to finally break above $58.00 in the last half hour of trading is the FOMC announcement that sees a “somewhat firmer economic growth” and inflation pressures that “seem likely to moderate over time,” implying an ideal goldilock economy in the offing.
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.
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.
Result of prior trade: Short at $57.20 established today was stopped out at $58.20 for a $1.00 loss.
Strategy: Sit tight.
Dr. Chen
On Jan. 24 Crude Oil Market Analysis stated, “the U.S. oil industry agrees with Crude Oil Market Analysis, but the market does not. As a result, COMA made the right forecast of the fundamentals but still lost money.” The same summary applies to COMA today.
The reported refinery input is 14.8 million barrels per day, slightly above COMA forecast of 14.7 million barrels per day. The reported import is 10.0 million barrels per day, in line with COMA forecast of a recovery in import. The resulting crude build of 2.7 million barrels is closer to COMA forecast of a build of 2.0 million barrels than the Wall Street forecast of a build of 1.2-1.5 million barrels.
The reported gasoline production is 9.1 million barrels per day, slightly above COMA forecast of 9.0 million barrels per day. The reported demand is 9.1 million barrels per day, slightly above COMA forecast of 9.0 million barrels per day. The reported import is 1.3 million barrels per day, above COMA forecast of an increase from 911,000 barrels per day to 1.1 million barrels per day. The gasoline build of 3.8 million barrels is closer to COMA forecast of a build of 2.0 million barrels than the Wall Street forecast of a build of 1.4-1.6 million barrels even though COMA underestimated the import level.
The reported distillate production is 4.0 million barrels per day, slightly above COMA forecast of 3.9 million barrels per day. The reported demand is 4.5 million barrels per day, above COMA forecast of 4.3 million barrels per day. The reported import is 364,000 barrels per day, lower than COMA forecast of over 450,000 barrels per day. The distillate draw of 2.6 million barrels is slightly above COMA forecast of a draw of 2.4 million barrels.
The market opened fairly uneventfully at $56.40. After the DOE report the market traded erratically between $55.75 and $57.80. In the last half an hour, perhaps due to the FOMC announcement, the market decided to break $58.00 to reach a high of $58.20 before closing six cents lower at $58.14. The two-day rally of $4.13 is the biggest two-day rally since Dec. 14 and Dec. 15 of 2004 when the market rallied by $3.18, but at a mathematically lower percentage.
One bullish news today is that the U.S. economy grew at a 3.5% annual rate in the last quarter of 2006 after growing at a 2.0% annual rate in the prior quarter. Another bullish news that may have caused the market to finally break above $58.00 in the last half hour of trading is the FOMC announcement that sees a “somewhat firmer economic growth” and inflation pressures that “seem likely to moderate over time,” implying an ideal goldilock economy in the offing.
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.
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.
Result of prior trade: Short at $57.20 established today was stopped out at $58.20 for a $1.00 loss.
Strategy: Sit tight.
Dr. Chen
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
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
Monday, January 29, 2007
Crude Oil Market Analysis (1/29/07)
Today’s market action followed Jan. 29’s Crude Oil Market Analysis when it forecast that “fundamentally, the market risk remains on the upside,” but that “technically, the market looks very weak.”
The market opened Sunday higher and reached an overnight high of $55.95 but could not break $56.00 and steadily fell during the course of the day to close $1.41 lower at $54.01.
The bearish news includes (1) that the Saudi Ambassador to the U.S. called the current oil price “adequate” for both oil-producing countries and oil-consuming countries, and (2) that the National Weather Service forecast that the temperature will gradually rise from below-normal in early February to normal and above-normal from mid-February to March.
As COMA stated on Jan. 23, in the short term the market “has little direction.” Thus any news can cause the market to swing one way, only to be undone the other way by different news later on, as the market has shown since COMA made the forecast on Jan. 23.
Fundamentally, the market is still buoyed by the cold weather in the short term, so the market risk remains slightly on the upside.
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.
Strategy: Buy at $53.35 with a stop at $51.85, take profit above $57.50. Sell at $57.20 with a stop at $58.20, take profit below $51.00.
Dr. Chen
The market opened Sunday higher and reached an overnight high of $55.95 but could not break $56.00 and steadily fell during the course of the day to close $1.41 lower at $54.01.
The bearish news includes (1) that the Saudi Ambassador to the U.S. called the current oil price “adequate” for both oil-producing countries and oil-consuming countries, and (2) that the National Weather Service forecast that the temperature will gradually rise from below-normal in early February to normal and above-normal from mid-February to March.
As COMA stated on Jan. 23, in the short term the market “has little direction.” Thus any news can cause the market to swing one way, only to be undone the other way by different news later on, as the market has shown since COMA made the forecast on Jan. 23.
Fundamentally, the market is still buoyed by the cold weather in the short term, so the market risk remains slightly on the upside.
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.
Strategy: Buy at $53.35 with a stop at $51.85, take profit above $57.50. Sell at $57.20 with a stop at $58.20, take profit below $51.00.
Dr. Chen
Saturday, January 27, 2007
Crude Oil Market Analysis (1/26/07)
PRELUDE: IN DEFENSE OF THE BULLS
As soon as the market dropped by 36% from July’s high of $78.40 to last week’s of $49.90, some analysts began to feel vindicated and claim credit for their forecasts by saying, “I told you so when the market was at $78.”
Yes, sir! You said so last summer, but you did not say, “no hurricane will affect Gulf production this summer,” or “the winter will have record-setting warmth.” Now you claim the credit for what is due to Mother Nature. The matter of fact is that not a single hurricane affected the Gulf oil production last summer, and the U.S. Midwest and Northeast had a record-setting warmth in December. If four hurricanes had shut down Gulf oil production in the summer followed by record-setting cold temperature, today’s oil price would be close of $100, not the “high” price of $78.
The bulls who got long last summer at $78 in anticipation of these events were justified to do so. Only in hindsight do the bulls look silly. But hindsight is always 20-20.
BusinessWeek’s Feb. 5 issue calls for a supply-demand equilibrium at the current price and writes, “it’s anyone’s guess where oil prices will go from here” (p. 39). BusinessWeek cannot be wrong in its statement because that “it’s anyone’s guess where oil prices will go from here” is a perpetual truism that cannot be defeated.
Journalists write this type of “true” statement because they have to write something, as much as sports commentators make certain “true” observation because they have to make comments.
At last Sunday’s NFC Championship game between the Saints and the Bears, the Saints challenged a ruling of a fumble on the field rather than an incomplete pass. After the referee upheld the ruling on the field, a Fox Sports commentator, either Troy Aikman or Joe Buck said, “there is no conclusive evidence to overturn a call either way, so a ruling of an incomplete pass probably would also stand.” Of course, a ruling of an incomplete pass would stand as it always does because it cannot be reviewed.
Today’s market action followed yesterday’s forecast, as Crude Oil Market Analysis stated yesterday that “the market does not need any particular news to move in a $1.77 range, and that “Crude Oil Market Analysis cannot determine the precise reason for today's market decline.” Instead, COMA gave a reason for the market to rise today by stating that “fundamentally the market risk is gradually tipping toward the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away.”
After yesterday’s $1.15 decline to close at $54.23, the market rose steadily from the overnight low of $54.20 to close $1.19 higher at $55.42, leaving the market almost unchanged after two days.
In addition to the persistent cold weather pattern, another bullish news today is the report by Lloyds that OPEC export fell to below 23 million barrels per day from November’s below 24 million barrels per day after having fallen 700,000 barrels per day from October. The Lloyds report is not necessarily contrary to the report yesterday by Oil Movement that OPEC export will rise by 270,000 barrels per day for the four-week period ending Feb. 10, which report may have caused the market to fall yesterday.
Although the underlying weather condition and the impending OPEC production cut on Feb. 1 both contribute to a bullish sentiment in the market, Crude Oil Market Analysis perceives a bull trap, or more precisely, a CONSPIRACY in the current market turnaround.
First of all, Nymex daily crude oil volume has been steadily falling since hitting an all-time record of 800,371 contracts on Jan. 11. Jan. 24 volume was 412,024 contracts followed by Jan. 25 volume of 367,449 contracts, two consecutive lows so far this year. The consecutive lower volumes occurred in a rising market from a low of $49.90 to above $55.00.
But an even more sinister omen is today’s CFTC’s COT report. The report shows that for the week ending on Jan. 23, 2007, a day the market had the most increase of $2.46 since Sept. 15, 2006, the net short interest increased from 2,032 contracts to 8,499 contracts amidst a steep decrease of 47,782 contracts in open interest. In other words, in a week when the market had a $3.08 increase in a sign of bottoming out, the longs were bailing out; in contrast to the previous week when the market had a $4.43 drop, the longs were rushing in.
It is not unusual that when the market begins to bottom out, the longs exit the market because those longs who were trapped in lower prices at the market bottom now sigh a relief and exit the market to cut their losses. Such a long exit usually is preceded by short-covering as the shorts see the market bottom and protect their profits.
However, the circumstances surrounding the market turnaround this time is very suspicious.
As Crude Oil Market Analysis observed on Jan. 19, “the CFTC’s COT report shows that for the week ending on Jan. 9, the non-commercial interests had gone from a net long of 2,194 contracts to a net short of 22,358 contracts, a whopping change of 24,552 contracts amidst an increase of 53,651 new open contracts. But in the following week ending on Jan. 16 the net short interests fell by 20,326 contracts to merely 2,032 contracts amidst another huge increase in open interest by 37,088 contracts.”
When COMA made the observation on Jan. 19, COMA could not explain such an unusual market action as to why the longs would pick a market bottom in a bear market before the shorts saw the market bottom, effectively attempting to force the shorts’ hands to cover “or else.”
After three weeks’ CFTC’s COT reports, a clue appears that it is not the longs who forced the shorts’ hands, but vice versa.
There has been a rumor--that is, a rumor, a gossip, a hearsay, a speculation, a guess--on Wall Street that a collapse of the Amaranth magnitude is brewing and will materialize if the market falls below $50. Such a rumor appears to be the missing link among the last three CFTC’s COT reports. The following explanation would piece together all parts of the puzzle and make sense.
The bear market was in full throttle as the bears rode the bandwagon from $61.05 all the way to $55.64, as evidenced by the influx of shorts for the week ending on Jan. 9. As the market continued to fall, certain market participants realized that they would face a margin call if the value of their contracts should decrease when crude oil drops below $50.00, and these market participants were forced to support the market by continuing to accumulate more long positions even though the shorts saw no need to cover their positions. As a result, the longs increased their strength even in a week ending on Jan. 16 when the market continued to fall from $55.64 to $51.21.
On Jan. 19 COMA could not explain this “catching-a-falling-knife” phenomenon other than to say that “as the longs are convinced that the market is going to turn at this moment, the shorts are sitting tight waiting for the next leg of downward movement.” The explanation now in retrospect is that the longs would rather take a chance to catch a falling knife than be a sitting duck and be slaughtered by the shorts, and such an epic battle between the longs and the shorts resulted in the record trading volume of 800,371 contracts on Jan. 11.
As the market held above $50.00, some shorts began to cover to take profit, which gave the market a boost. As the market rose, the longs exited mostly before $55.00 for fear of another bear assault. Once the longs exited the market on or before Jan. 23 when the market closed at $55.04, the epic battle that occurred for over a week ended, and the trading volume in the market fell precipitously to two consecutive year-to-date lows on Jan. 24 and Jan. 25 for 412,024 contracts and 367,449 contracts, respectively.
This is a big conspiracy theory, though. However, Crude Oil Market Analysis has no other ways of tying together all these facts which COMA can observe since the New Year and which do not conform to the common sense of trading. The credibility of the conspiracy theory will be proved or disproved by market action and data in the next few weeks.
Although alleging that Secretary Bodman is part of the conspiracy would be tenuous, the eerie timing of his announcement on Jan, 23 is worth noting.
Crude Oil Market Analysis stated on Jan. 19 that “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Then COMA stated on Jan. 22 that “the bulls need the market to stay above $53.10 just to avoid another bear assault to run toward the contract’s low of $51.03. However, unless Wed.’s DOE report shows a crude oil draw of 2.5 million barrels or greater, the market’s test of the $50.00 support is inevitable. In other words, it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.” COMA was fairly certain about the market’s will to retest the $50 support.
After a failed attempt by the market to trade above $54.85 to close at $52.58 on Jan. 22, on Jan. 23 the market rose steadily from the overnight low of $52.41 to $53.94 at 12:30 p.m. but could not break $54.00 and then fell to $53.23 at 1:30 p.m. In other words, the bears had done $0.70 out of the $0.93 job needed to push the market down to $53.00. Once the market touched $53.00, it would not look back and would go straight to test the contract low of $51.03 and then the $50.00 support for the March contract. And the bears had almost one hour to chip away the last 23 cents before the pit trading would close.
At this critical moment Secretary Bodman announced the U.S. plan to double its SPR to 1.5 billion in the next 20 years. Then the rest is history. The bears were as close as 23 cents away from burying the bulls. If the market had dropped below $50, the momentum would carry it to $46.20, and none of the weather conditions would have mattered because once the market decides to move in certain direction, it is blind to underlying conditions, much like a train coasting down a hill without a brake would crush any obstacles on its way.
Fundamentally, the market risk remains on the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away, thus giving the market a support for the time being.
Technically, the market looks very weak, as the market data show that the rebound in the past week was caused by longs who threw in all their weight to put a brake on a downwardly moving market in an attempt to avoid margin call and forced liquidation.
Strategy: Buy at $53.35 with a stop at $51.85; take profit above $57.50. Sell at $57.25 with a stop at $58.20; take profit below $50.00.
Dr. Chen
As soon as the market dropped by 36% from July’s high of $78.40 to last week’s of $49.90, some analysts began to feel vindicated and claim credit for their forecasts by saying, “I told you so when the market was at $78.”
Yes, sir! You said so last summer, but you did not say, “no hurricane will affect Gulf production this summer,” or “the winter will have record-setting warmth.” Now you claim the credit for what is due to Mother Nature. The matter of fact is that not a single hurricane affected the Gulf oil production last summer, and the U.S. Midwest and Northeast had a record-setting warmth in December. If four hurricanes had shut down Gulf oil production in the summer followed by record-setting cold temperature, today’s oil price would be close of $100, not the “high” price of $78.
The bulls who got long last summer at $78 in anticipation of these events were justified to do so. Only in hindsight do the bulls look silly. But hindsight is always 20-20.
BusinessWeek’s Feb. 5 issue calls for a supply-demand equilibrium at the current price and writes, “it’s anyone’s guess where oil prices will go from here” (p. 39). BusinessWeek cannot be wrong in its statement because that “it’s anyone’s guess where oil prices will go from here” is a perpetual truism that cannot be defeated.
Journalists write this type of “true” statement because they have to write something, as much as sports commentators make certain “true” observation because they have to make comments.
At last Sunday’s NFC Championship game between the Saints and the Bears, the Saints challenged a ruling of a fumble on the field rather than an incomplete pass. After the referee upheld the ruling on the field, a Fox Sports commentator, either Troy Aikman or Joe Buck said, “there is no conclusive evidence to overturn a call either way, so a ruling of an incomplete pass probably would also stand.” Of course, a ruling of an incomplete pass would stand as it always does because it cannot be reviewed.
Today’s market action followed yesterday’s forecast, as Crude Oil Market Analysis stated yesterday that “the market does not need any particular news to move in a $1.77 range, and that “Crude Oil Market Analysis cannot determine the precise reason for today's market decline.” Instead, COMA gave a reason for the market to rise today by stating that “fundamentally the market risk is gradually tipping toward the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away.”
After yesterday’s $1.15 decline to close at $54.23, the market rose steadily from the overnight low of $54.20 to close $1.19 higher at $55.42, leaving the market almost unchanged after two days.
In addition to the persistent cold weather pattern, another bullish news today is the report by Lloyds that OPEC export fell to below 23 million barrels per day from November’s below 24 million barrels per day after having fallen 700,000 barrels per day from October. The Lloyds report is not necessarily contrary to the report yesterday by Oil Movement that OPEC export will rise by 270,000 barrels per day for the four-week period ending Feb. 10, which report may have caused the market to fall yesterday.
Although the underlying weather condition and the impending OPEC production cut on Feb. 1 both contribute to a bullish sentiment in the market, Crude Oil Market Analysis perceives a bull trap, or more precisely, a CONSPIRACY in the current market turnaround.
First of all, Nymex daily crude oil volume has been steadily falling since hitting an all-time record of 800,371 contracts on Jan. 11. Jan. 24 volume was 412,024 contracts followed by Jan. 25 volume of 367,449 contracts, two consecutive lows so far this year. The consecutive lower volumes occurred in a rising market from a low of $49.90 to above $55.00.
But an even more sinister omen is today’s CFTC’s COT report. The report shows that for the week ending on Jan. 23, 2007, a day the market had the most increase of $2.46 since Sept. 15, 2006, the net short interest increased from 2,032 contracts to 8,499 contracts amidst a steep decrease of 47,782 contracts in open interest. In other words, in a week when the market had a $3.08 increase in a sign of bottoming out, the longs were bailing out; in contrast to the previous week when the market had a $4.43 drop, the longs were rushing in.
It is not unusual that when the market begins to bottom out, the longs exit the market because those longs who were trapped in lower prices at the market bottom now sigh a relief and exit the market to cut their losses. Such a long exit usually is preceded by short-covering as the shorts see the market bottom and protect their profits.
However, the circumstances surrounding the market turnaround this time is very suspicious.
As Crude Oil Market Analysis observed on Jan. 19, “the CFTC’s COT report shows that for the week ending on Jan. 9, the non-commercial interests had gone from a net long of 2,194 contracts to a net short of 22,358 contracts, a whopping change of 24,552 contracts amidst an increase of 53,651 new open contracts. But in the following week ending on Jan. 16 the net short interests fell by 20,326 contracts to merely 2,032 contracts amidst another huge increase in open interest by 37,088 contracts.”
When COMA made the observation on Jan. 19, COMA could not explain such an unusual market action as to why the longs would pick a market bottom in a bear market before the shorts saw the market bottom, effectively attempting to force the shorts’ hands to cover “or else.”
After three weeks’ CFTC’s COT reports, a clue appears that it is not the longs who forced the shorts’ hands, but vice versa.
There has been a rumor--that is, a rumor, a gossip, a hearsay, a speculation, a guess--on Wall Street that a collapse of the Amaranth magnitude is brewing and will materialize if the market falls below $50. Such a rumor appears to be the missing link among the last three CFTC’s COT reports. The following explanation would piece together all parts of the puzzle and make sense.
The bear market was in full throttle as the bears rode the bandwagon from $61.05 all the way to $55.64, as evidenced by the influx of shorts for the week ending on Jan. 9. As the market continued to fall, certain market participants realized that they would face a margin call if the value of their contracts should decrease when crude oil drops below $50.00, and these market participants were forced to support the market by continuing to accumulate more long positions even though the shorts saw no need to cover their positions. As a result, the longs increased their strength even in a week ending on Jan. 16 when the market continued to fall from $55.64 to $51.21.
On Jan. 19 COMA could not explain this “catching-a-falling-knife” phenomenon other than to say that “as the longs are convinced that the market is going to turn at this moment, the shorts are sitting tight waiting for the next leg of downward movement.” The explanation now in retrospect is that the longs would rather take a chance to catch a falling knife than be a sitting duck and be slaughtered by the shorts, and such an epic battle between the longs and the shorts resulted in the record trading volume of 800,371 contracts on Jan. 11.
As the market held above $50.00, some shorts began to cover to take profit, which gave the market a boost. As the market rose, the longs exited mostly before $55.00 for fear of another bear assault. Once the longs exited the market on or before Jan. 23 when the market closed at $55.04, the epic battle that occurred for over a week ended, and the trading volume in the market fell precipitously to two consecutive year-to-date lows on Jan. 24 and Jan. 25 for 412,024 contracts and 367,449 contracts, respectively.
This is a big conspiracy theory, though. However, Crude Oil Market Analysis has no other ways of tying together all these facts which COMA can observe since the New Year and which do not conform to the common sense of trading. The credibility of the conspiracy theory will be proved or disproved by market action and data in the next few weeks.
Although alleging that Secretary Bodman is part of the conspiracy would be tenuous, the eerie timing of his announcement on Jan, 23 is worth noting.
Crude Oil Market Analysis stated on Jan. 19 that “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Then COMA stated on Jan. 22 that “the bulls need the market to stay above $53.10 just to avoid another bear assault to run toward the contract’s low of $51.03. However, unless Wed.’s DOE report shows a crude oil draw of 2.5 million barrels or greater, the market’s test of the $50.00 support is inevitable. In other words, it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.” COMA was fairly certain about the market’s will to retest the $50 support.
After a failed attempt by the market to trade above $54.85 to close at $52.58 on Jan. 22, on Jan. 23 the market rose steadily from the overnight low of $52.41 to $53.94 at 12:30 p.m. but could not break $54.00 and then fell to $53.23 at 1:30 p.m. In other words, the bears had done $0.70 out of the $0.93 job needed to push the market down to $53.00. Once the market touched $53.00, it would not look back and would go straight to test the contract low of $51.03 and then the $50.00 support for the March contract. And the bears had almost one hour to chip away the last 23 cents before the pit trading would close.
At this critical moment Secretary Bodman announced the U.S. plan to double its SPR to 1.5 billion in the next 20 years. Then the rest is history. The bears were as close as 23 cents away from burying the bulls. If the market had dropped below $50, the momentum would carry it to $46.20, and none of the weather conditions would have mattered because once the market decides to move in certain direction, it is blind to underlying conditions, much like a train coasting down a hill without a brake would crush any obstacles on its way.
Fundamentally, the market risk remains on the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away, thus giving the market a support for the time being.
Technically, the market looks very weak, as the market data show that the rebound in the past week was caused by longs who threw in all their weight to put a brake on a downwardly moving market in an attempt to avoid margin call and forced liquidation.
Strategy: Buy at $53.35 with a stop at $51.85; take profit above $57.50. Sell at $57.25 with a stop at $58.20; take profit below $50.00.
Dr. Chen
Thursday, January 25, 2007
Crude Oil Market Analysis (1/25/07)
Today the market followed yesterday’s forecast that “it has little direction as the bulls and bears sort themselves out.”
The market opened at $55.16 and continued yesterday’s rise to a high of $55.87. But the market had no direction, so it turned around to drop steadily to close at $54.23.
Today’s market decline may have been caused by certain bearish news. First of all, yesterday’s DOE report was clearly bearish—and was perceived to be so after its release, so today’s market decline may have come as a delayed reaction to yesterday’s DOE report. Secondly, the market may again have embraced its skepticism that OPEC will strictly comply with its production cut after Oil Movement expects OPEC export to rise by 270,000 barrels per day for the four-week period ending Feb. 10. Finally, existing home sales in December fell to an annual rate of 6.22 million units, a 0.8% decrease from November's annual rate of 6.27 million units, culminating in the total sales for all of 2006 dropping by 8.4% to 6.48 million units from a record 7.08 million units in 2005, the steepest drop in percentage since the 17.7% drop in 1982. The foundering housing market bodes poorly for the demand for commodities such as energy and metal.
Crude Oil Market Analysis believes that the above three factors may be used as, but not necessarily are, the reasons behind the market decline today. The truth of the matter is that given the market volatility, the market does not need any particular news to move in a $1.77 range.
One major change in the market, however, warrants a special attention by market participants, which is the increasing open interest and the associated volatility. There are a record number of over 1.3 million outstanding crude oil contracts as of Jan. 16, 2007, and this record number reflects a sea change in the market sentiment toward the energy market even among the traditional hedgers. (This is not to be confused with hedge funds, which are speculators.)
Traditionally airlines, among others, are the genuine hedgers that use the futures market to hedge against risks associated with the fluctuation of energy prices. In 2006 after AMR, the parent company of American Airlines, broke even for its energy hedging operation with gains for the first half and offsetting losses for the second half, a senior AMR executive said, “hedging is one of those things you have to be careful with.” Apparently AMR was dissatisfied with the result of breaking even for its hedging operation, but AMR’s attitude toward its operation is ironic because the purpose of AMR’s hedging operation is exactly what was achieved—breaking even despite the market fluctuation of energy prices. AMR was dissatisfied with the hedging operation presumably because it viewed its hedging operation as a profit center, much in the same way Enron’s trading arm was expected to do. But AMR is in the business of transporting passengers by air, not in the business of trading energy futures. As more and more traditional hedgers view energy trading as a means of generating profit, the open interest will continue to increase, and such an increase will inevitably bring higher level of volatility to the market.
Fundamentally the market risk is gradually tipping toward the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away. As the cold weather continues while refinery turnaround remains low, the ample distillate stock that has justified the current market price will gradually shrink, thus tightening the supply at a time OPEC begins to implement its second round of production cut.
Technically, as COMA forecast yesterday, “after closing above $55.00 for two consecutive days, the market has placed a firm floor on $50.00 in the short term.”
Strategy: Buy at $53.35 with a stop at $51.85; take profit above $57.50.
Dr. Chen
QUOTE OF THE DAY
Since Crude Oil Market Analysis cannot determine the precise reason for today's market decline, perhaps the best way to describe the reason behind today's market decline is to quote former Defense Secretary Donald Rumsfeld when he responded to reporter's question about the alleged link between Saddam Hussein and al-Qaeda on Feb. 12, 2002.
"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns--the ones we don't know we don't know."
Perhaps the reason behind today's market decline is either a "known unknown" or an "unknown unknown."
The market opened at $55.16 and continued yesterday’s rise to a high of $55.87. But the market had no direction, so it turned around to drop steadily to close at $54.23.
Today’s market decline may have been caused by certain bearish news. First of all, yesterday’s DOE report was clearly bearish—and was perceived to be so after its release, so today’s market decline may have come as a delayed reaction to yesterday’s DOE report. Secondly, the market may again have embraced its skepticism that OPEC will strictly comply with its production cut after Oil Movement expects OPEC export to rise by 270,000 barrels per day for the four-week period ending Feb. 10. Finally, existing home sales in December fell to an annual rate of 6.22 million units, a 0.8% decrease from November's annual rate of 6.27 million units, culminating in the total sales for all of 2006 dropping by 8.4% to 6.48 million units from a record 7.08 million units in 2005, the steepest drop in percentage since the 17.7% drop in 1982. The foundering housing market bodes poorly for the demand for commodities such as energy and metal.
Crude Oil Market Analysis believes that the above three factors may be used as, but not necessarily are, the reasons behind the market decline today. The truth of the matter is that given the market volatility, the market does not need any particular news to move in a $1.77 range.
One major change in the market, however, warrants a special attention by market participants, which is the increasing open interest and the associated volatility. There are a record number of over 1.3 million outstanding crude oil contracts as of Jan. 16, 2007, and this record number reflects a sea change in the market sentiment toward the energy market even among the traditional hedgers. (This is not to be confused with hedge funds, which are speculators.)
Traditionally airlines, among others, are the genuine hedgers that use the futures market to hedge against risks associated with the fluctuation of energy prices. In 2006 after AMR, the parent company of American Airlines, broke even for its energy hedging operation with gains for the first half and offsetting losses for the second half, a senior AMR executive said, “hedging is one of those things you have to be careful with.” Apparently AMR was dissatisfied with the result of breaking even for its hedging operation, but AMR’s attitude toward its operation is ironic because the purpose of AMR’s hedging operation is exactly what was achieved—breaking even despite the market fluctuation of energy prices. AMR was dissatisfied with the hedging operation presumably because it viewed its hedging operation as a profit center, much in the same way Enron’s trading arm was expected to do. But AMR is in the business of transporting passengers by air, not in the business of trading energy futures. As more and more traditional hedgers view energy trading as a means of generating profit, the open interest will continue to increase, and such an increase will inevitably bring higher level of volatility to the market.
Fundamentally the market risk is gradually tipping toward the upside, as the cold weather pattern remains stagnant over much of the U.S. with no sign of going away. As the cold weather continues while refinery turnaround remains low, the ample distillate stock that has justified the current market price will gradually shrink, thus tightening the supply at a time OPEC begins to implement its second round of production cut.
Technically, as COMA forecast yesterday, “after closing above $55.00 for two consecutive days, the market has placed a firm floor on $50.00 in the short term.”
Strategy: Buy at $53.35 with a stop at $51.85; take profit above $57.50.
Dr. Chen
QUOTE OF THE DAY
Since Crude Oil Market Analysis cannot determine the precise reason for today's market decline, perhaps the best way to describe the reason behind today's market decline is to quote former Defense Secretary Donald Rumsfeld when he responded to reporter's question about the alleged link between Saddam Hussein and al-Qaeda on Feb. 12, 2002.
"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns--the ones we don't know we don't know."
Perhaps the reason behind today's market decline is either a "known unknown" or an "unknown unknown."
Wednesday, January 24, 2007
Crude Oil Market Analysis (1/24/07 p.m.)
The U.S. oil industry agrees with Crude Oil Market Analysis (“COMA”), but the market does not. As a result, COMA made the right forecast of the fundamentals but still lost money.
The reported refinery input is 14.9 million barrels per day, in line with COMA forecast. The reported import is 9.8 million barrels per day, slightly below the low end of COMA forecast. The resulting crude build of 700,000 barrels is just above the low end of COMA forecast.
The reported gasoline production is 9.1 million barrels per day, above the COMA forecast of 8.9 million barrels per day. The reported demand is 9.008 million barrels per day, in line with the COMA forecast of “below 9.0 million barrels per day.” The reported import is 911,000 barrels per day, but COMA made no forecast of the import. The gasoline build of 4.0 million barrels is above the Wall Street forecast of 1.2-1.5 million barrels, with which COMA agreed because COMA had forecast a lower production.
The reported distillate production is 3.9 million barrels per day, in line with COMA forecast. The reported demand is 4.107 million barrels per day, in line with the COMA forecast of “above 4.1 million barrels per day.” The reported import is 436,000 barrels per day, greater than the COMA forecast of over 350,000 barrels per day. As a result, the reported distillate stock has a build while COMA forecast a draw.
The market opened at $54.76 but struggled to rise above $55.00. Once the DOE report was released, the report was clearly perceived as bearish, and the market dropped from nearly $55.00 to today’s low of $53.66. From that moment on the market traded without direction as it tried to decide whether to trade up above $55.00 or trade down below $54.00 by first breaking yesterday’s high of $55.15 to reach a high of $55.26--$0.01 above COMA’s buy stop at $55.25--but only to drop to a low of $54.34 later. The trading range of $0.92 is not significant, but what is significant is that the market kept trading above and below support and resistance levels without any follow-through. In the end the market chose to go up and closed $0.33 higher at $55.37.
Fundamentally, assuming that OPEC will continue to implement its production quota half-heartedly, the market supply and demand are balanced. On one hand, for every week in which the crude stock builds, there is one less week left in the winter in which the crude stock will draw. On the other hand, even Iraq, the only OPEC member who is not bound by its quota, has agreed to voluntarily reduce its output from the current 1.9 million barrels per day to 1.6 million barrels per day, reflecting at least some resolve among OPEC members to reign in production.
Technically, COMA stated on Jan. 19 that “the market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term.” After closing above $55.00 for two consecutive days, the market has placed a firm floor on $50.00 in the short term.
As COMA stated yesterday, “in the short term the market becomes difficult to forecast, because it has little direction as the bulls and bears sort themselves out in the next couple of weeks.” It is also a COMA opinion stated in a previous paragraph that “the market supply and demand are balanced.”
Result of previous trade: Short established at $54.40 today was stopped out at $55.25 for an $0.85 loss.
Strategy: Sit tight.
Dr. Chen
The reported refinery input is 14.9 million barrels per day, in line with COMA forecast. The reported import is 9.8 million barrels per day, slightly below the low end of COMA forecast. The resulting crude build of 700,000 barrels is just above the low end of COMA forecast.
The reported gasoline production is 9.1 million barrels per day, above the COMA forecast of 8.9 million barrels per day. The reported demand is 9.008 million barrels per day, in line with the COMA forecast of “below 9.0 million barrels per day.” The reported import is 911,000 barrels per day, but COMA made no forecast of the import. The gasoline build of 4.0 million barrels is above the Wall Street forecast of 1.2-1.5 million barrels, with which COMA agreed because COMA had forecast a lower production.
The reported distillate production is 3.9 million barrels per day, in line with COMA forecast. The reported demand is 4.107 million barrels per day, in line with the COMA forecast of “above 4.1 million barrels per day.” The reported import is 436,000 barrels per day, greater than the COMA forecast of over 350,000 barrels per day. As a result, the reported distillate stock has a build while COMA forecast a draw.
The market opened at $54.76 but struggled to rise above $55.00. Once the DOE report was released, the report was clearly perceived as bearish, and the market dropped from nearly $55.00 to today’s low of $53.66. From that moment on the market traded without direction as it tried to decide whether to trade up above $55.00 or trade down below $54.00 by first breaking yesterday’s high of $55.15 to reach a high of $55.26--$0.01 above COMA’s buy stop at $55.25--but only to drop to a low of $54.34 later. The trading range of $0.92 is not significant, but what is significant is that the market kept trading above and below support and resistance levels without any follow-through. In the end the market chose to go up and closed $0.33 higher at $55.37.
Fundamentally, assuming that OPEC will continue to implement its production quota half-heartedly, the market supply and demand are balanced. On one hand, for every week in which the crude stock builds, there is one less week left in the winter in which the crude stock will draw. On the other hand, even Iraq, the only OPEC member who is not bound by its quota, has agreed to voluntarily reduce its output from the current 1.9 million barrels per day to 1.6 million barrels per day, reflecting at least some resolve among OPEC members to reign in production.
Technically, COMA stated on Jan. 19 that “the market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term.” After closing above $55.00 for two consecutive days, the market has placed a firm floor on $50.00 in the short term.
As COMA stated yesterday, “in the short term the market becomes difficult to forecast, because it has little direction as the bulls and bears sort themselves out in the next couple of weeks.” It is also a COMA opinion stated in a previous paragraph that “the market supply and demand are balanced.”
Result of previous trade: Short established at $54.40 today was stopped out at $55.25 for an $0.85 loss.
Strategy: Sit tight.
Dr. Chen
Crude Oil Market Analysis (1/24/07 a.m.)
Sell March crude at market currently at $54.40 with a stop at $55.25. A full analysis will be provided at the end of the day.
Dr. Chen
Dr. Chen
Crude Oil Market Analysis (1/23/07)
“I have yet begun to fight.” –John Paul Jones
Today is another day of heavy fighting between the bulls and the bears. As Crude Oil Market Analysis (“COMA”) observed on Jan. 19, “all these factors contribute to a battleground for the bulls and bears at $46.20-$54.86…. The sharp increase in open interests in the past two weeks explains the volatile market movement both intraday and during the two-week period. Likewise, when either the longs or the shorts decide to bail out, the market movement will be equally volatile.”
“Volatile it is, indeed.” Master Yoda would speak in this reverse fashion. Yesterday the market dropped from $54.65 to $52.07 for $2.58 in three hours. Today the market slowly rose from the overnight low of $52.41 and rallied from $53.64 to a high of $55.15 for $1.51 in the last half hour of trading before closing at $55.04, leaving the day’s range as $2.74.
Yesterday COMA forecast a downward market movement if the market would stay below $53.10 and a range-bound day if the market would stay above $53.10. But the COMA forecast was wrong. However, COMA offers no apology but only apologia because COMA could not have forecast that the U.S. Energy Secretary Samuel Bodman would make the announcement that the U.S. will expand its SPR by 1.5 billion barrels in the next 20 years—the market heard the “1.5 billion barrels” but not the “20 years”—by injecting 100,000 barrels per day to the SPR starting in the spring until the initial installment of 11 million barrels are added to the SPR. (If COMA had been able to make the forecast of the announcement, very soon the COMA would be published from a slammer.) After the announcement the market immediately jumped $1.51 in half an hour.
Yesterday the bulls initially pounded the bears until the bulls ran out of steam at $54.65, and then the bears beat back the bulls for $2.58. Today the bulls came back again—not with a vengeance because they themselves could only push the market to a high of $53.93. As COMA forecast on Jan. 19, “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Just as the bears were about to show the bulls the path to $50.00, Secretary Bodman became the bulls’ deus ex machina as the final arbiter of the market and gave the market just a little push to above $54.00. Once the market went above $54.00, the bears finally relented and retreated. The ensuing short-covering rally resulted in a one-day gain of $2.46, the biggest one-day gain since Sept. 19, 2005 when the market rallied $4.39 in one day.
Although COMA stated on Jan. 19 that “the market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term,” today’s market rally has little implication by itself.
Today’s rally is mostly technically driven triggered by an event that has little fundamental basis. Today’s market is technically driven because as COMA observed on Jan. 19, when the new longs are coming in while the old shorts refuse to give in, once the dam breaks, in either direction, the flood will run further than it would do from a natural lake.
However, the event that triggered the dam breaking has little fundamental backup. First of all, the DOE will take away only 100,000 barrels per day from the market, which is less than 0.5% of the daily U.S. demand, and this quantity of oil can be easily supplied by the U.S. ally Saudi Arabia, now that Saudi Arabia has more spare capacity than before as it implements production cut. And the market knows this, as reflected by the fact that 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. Politically, as the campaign for the 2008 presidential election gets under way, the Administration, which includes the DOE, will be very sensitive about antagonizing voters with gasoline price hike caused by rising oil prices.
In the short term the market becomes difficult to forecast, because it has little direction as the bulls and bears sort themselves out in the next couple of weeks.
Tomorrow’s DOE report also becomes difficult to forecast.
Crude oil’s refinery input will likely continue to drop to 14.9 million barrels per day as refineries continue to shut down for maintenance. The crude import will drop from last week’s 11.1 million barrels per day to 10.0-10.5 million barrels per day, but this is a big range that may result in a crude build of 0.2-3.5 million barrels. Such a forecast has no meaning.
Gasoline production will also drop from 9.1 million barrels per day to 8.9 million barrels per day due to the reduced refinery turnaround. Such a drop will be matched by a drop in demand from 9.06 million barrels per day to below 9.0 million barrels per day as motorists are snowed in by the bad weather. Whether or not gasoline stock will build depends on the import level, which is difficult to forecast. If the import stays above 1.0 million barrels per day as it has been in the last two weeks, the gasoline stock will likely build by the Wall Street estimated 1.2-1.5 million barrels.
Distillate production will also drop from last weeks 4.0 million barrels per day to 3.9 million barrels per day due to refinery turnaround. Such a drop will be compensated by a rebound in import from last week’s 277,000 barrels per day to a more seasonal level of over 350,000 barrels per day. Demand will pick up from last week’s 3.98 million barrels per day to above 4.1 million barrels per day due to the cold weather. Thus, the overall net effect on distillate stock will be a draw, but the quantity depends on how much the increased import can compensate the reduced production and increased demand.
Yesterday’s COMA already expressed some vague concern that the market may start to rebound, as it stated the opinion that “it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.” As a result, COMA moved down the stop price by 85 cents from $55.05 to $54.20. As today’s market action demonstrated, once the market touched $54.20, it went on to rally another 95 cents and never dropped back.
Result of previous trade: Short at $53.80 established on Jan. 22 was stopped out at $54.20 for a $0.40 loss.
Strategy: Sit tight until the release of the DOE report.
Dr. Chen
Today is another day of heavy fighting between the bulls and the bears. As Crude Oil Market Analysis (“COMA”) observed on Jan. 19, “all these factors contribute to a battleground for the bulls and bears at $46.20-$54.86…. The sharp increase in open interests in the past two weeks explains the volatile market movement both intraday and during the two-week period. Likewise, when either the longs or the shorts decide to bail out, the market movement will be equally volatile.”
“Volatile it is, indeed.” Master Yoda would speak in this reverse fashion. Yesterday the market dropped from $54.65 to $52.07 for $2.58 in three hours. Today the market slowly rose from the overnight low of $52.41 and rallied from $53.64 to a high of $55.15 for $1.51 in the last half hour of trading before closing at $55.04, leaving the day’s range as $2.74.
Yesterday COMA forecast a downward market movement if the market would stay below $53.10 and a range-bound day if the market would stay above $53.10. But the COMA forecast was wrong. However, COMA offers no apology but only apologia because COMA could not have forecast that the U.S. Energy Secretary Samuel Bodman would make the announcement that the U.S. will expand its SPR by 1.5 billion barrels in the next 20 years—the market heard the “1.5 billion barrels” but not the “20 years”—by injecting 100,000 barrels per day to the SPR starting in the spring until the initial installment of 11 million barrels are added to the SPR. (If COMA had been able to make the forecast of the announcement, very soon the COMA would be published from a slammer.) After the announcement the market immediately jumped $1.51 in half an hour.
Yesterday the bulls initially pounded the bears until the bulls ran out of steam at $54.65, and then the bears beat back the bulls for $2.58. Today the bulls came back again—not with a vengeance because they themselves could only push the market to a high of $53.93. As COMA forecast on Jan. 19, “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Just as the bears were about to show the bulls the path to $50.00, Secretary Bodman became the bulls’ deus ex machina as the final arbiter of the market and gave the market just a little push to above $54.00. Once the market went above $54.00, the bears finally relented and retreated. The ensuing short-covering rally resulted in a one-day gain of $2.46, the biggest one-day gain since Sept. 19, 2005 when the market rallied $4.39 in one day.
Although COMA stated on Jan. 19 that “the market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term,” today’s market rally has little implication by itself.
Today’s rally is mostly technically driven triggered by an event that has little fundamental basis. Today’s market is technically driven because as COMA observed on Jan. 19, when the new longs are coming in while the old shorts refuse to give in, once the dam breaks, in either direction, the flood will run further than it would do from a natural lake.
However, the event that triggered the dam breaking has little fundamental backup. First of all, the DOE will take away only 100,000 barrels per day from the market, which is less than 0.5% of the daily U.S. demand, and this quantity of oil can be easily supplied by the U.S. ally Saudi Arabia, now that Saudi Arabia has more spare capacity than before as it implements production cut. And the market knows this, as reflected by the fact that 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. Politically, as the campaign for the 2008 presidential election gets under way, the Administration, which includes the DOE, will be very sensitive about antagonizing voters with gasoline price hike caused by rising oil prices.
In the short term the market becomes difficult to forecast, because it has little direction as the bulls and bears sort themselves out in the next couple of weeks.
Tomorrow’s DOE report also becomes difficult to forecast.
Crude oil’s refinery input will likely continue to drop to 14.9 million barrels per day as refineries continue to shut down for maintenance. The crude import will drop from last week’s 11.1 million barrels per day to 10.0-10.5 million barrels per day, but this is a big range that may result in a crude build of 0.2-3.5 million barrels. Such a forecast has no meaning.
Gasoline production will also drop from 9.1 million barrels per day to 8.9 million barrels per day due to the reduced refinery turnaround. Such a drop will be matched by a drop in demand from 9.06 million barrels per day to below 9.0 million barrels per day as motorists are snowed in by the bad weather. Whether or not gasoline stock will build depends on the import level, which is difficult to forecast. If the import stays above 1.0 million barrels per day as it has been in the last two weeks, the gasoline stock will likely build by the Wall Street estimated 1.2-1.5 million barrels.
Distillate production will also drop from last weeks 4.0 million barrels per day to 3.9 million barrels per day due to refinery turnaround. Such a drop will be compensated by a rebound in import from last week’s 277,000 barrels per day to a more seasonal level of over 350,000 barrels per day. Demand will pick up from last week’s 3.98 million barrels per day to above 4.1 million barrels per day due to the cold weather. Thus, the overall net effect on distillate stock will be a draw, but the quantity depends on how much the increased import can compensate the reduced production and increased demand.
Yesterday’s COMA already expressed some vague concern that the market may start to rebound, as it stated the opinion that “it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.” As a result, COMA moved down the stop price by 85 cents from $55.05 to $54.20. As today’s market action demonstrated, once the market touched $54.20, it went on to rally another 95 cents and never dropped back.
Result of previous trade: Short at $53.80 established on Jan. 22 was stopped out at $54.20 for a $0.40 loss.
Strategy: Sit tight until the release of the DOE report.
Dr. Chen
Monday, January 22, 2007
Crude Oil Market Analysis (1/22/07)
Today’s market action followed earlier forecasts.
COMA on Jan. 19 forecast that “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Also in response to a reader’s question overnight about the market action after the pit trading would later begin, COMA stated overnight that “the market overall looks weak so far since opening,” and that “the market action since opening shows a lack of momentum needed to trade above $54.85.”
The market rode Friday’s momentum at the opening of pit trading to open at $53.82, but since it lacked the momentum to trade above $54.85, it topped out at $54.65 and fell precipitously for $2.58 to a low of $52.07 before recovering some ground to close at $52.58.
Today’s market is nothing more than the bulls and bears again battling for positions. The bulls tried to ride Friday’s momentum with the north wind on their back to try to push above $54.85. Once they failed, the bears launched their broadside and depressed the market by more than $2.50.
Fundamentally, the market is slightly above its equilibrium, so a potential big move in either direction is unlikely, but the market risk remains on the downside.
Technically, the bulls need the market to stay above $53.10 just to avoid another bear assault to run toward the contract’s low of $51.03. However, unless Wed.’s DOE report shows a crude oil draw of 2.5 million barrels or greater, the market’s test of the $50.00 support is inevitable. In other words, it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.
Strategy: Jan. 19’s strategy to sell at $53.80 (with a stop at $55.05) was filled today, stop out at $54.20, take profit at $50.30.
Dr. Chen
COMA on Jan. 19 forecast that “if the market cannot stay above $54.00, it will again test and break the $50.00 support.” Also in response to a reader’s question overnight about the market action after the pit trading would later begin, COMA stated overnight that “the market overall looks weak so far since opening,” and that “the market action since opening shows a lack of momentum needed to trade above $54.85.”
The market rode Friday’s momentum at the opening of pit trading to open at $53.82, but since it lacked the momentum to trade above $54.85, it topped out at $54.65 and fell precipitously for $2.58 to a low of $52.07 before recovering some ground to close at $52.58.
Today’s market is nothing more than the bulls and bears again battling for positions. The bulls tried to ride Friday’s momentum with the north wind on their back to try to push above $54.85. Once they failed, the bears launched their broadside and depressed the market by more than $2.50.
Fundamentally, the market is slightly above its equilibrium, so a potential big move in either direction is unlikely, but the market risk remains on the downside.
Technically, the bulls need the market to stay above $53.10 just to avoid another bear assault to run toward the contract’s low of $51.03. However, unless Wed.’s DOE report shows a crude oil draw of 2.5 million barrels or greater, the market’s test of the $50.00 support is inevitable. In other words, it is not that the fundamentals justify the market’s drop to $50.00, but it is that the market wants to go there.
Strategy: Jan. 19’s strategy to sell at $53.80 (with a stop at $55.05) was filled today, stop out at $54.20, take profit at $50.30.
Dr. Chen
Saturday, January 20, 2007
Crude Oil Market Analysis (1/19/07)
Today’s market followed yesterday’s forecast that the market would begin to be range-bound despite having set a new low for each of the previous eight consecutive sessions, and the market had a sharp rebound.
The market moved in one direction from the overnight low of $51.48 to close at $53.40 for a $1.59 gain.
Currently the market is still very dynamic, as speculators play an “I-dare-you” game.
Fundamentally the market remains weak. The IEA reported on Jan. 18 that the oil demand in the 30-member OECD countries in 2006 fell for the first time in 20 years by a nominally insignificant 0.6%; however, the demand indeed decreased in 2006 in response to the record-high oil price. Oil demand in developed countries, however inelastic, finally responded to high prices when the price reached above $70 as oil consumers began to seek alternative sources of energy such as ethanol.
In addition, the IMF forecasts that Nigeria will spend $1.25 billion improving the oil-rich Niger River Delta in the run-up to April’s presidential election. Such spending will ease the tension in the region and bring Nigeria’s crude oil production from 2.35 million barrels per day in 2006 to 2.53 million barrels per day in 2007.
However, the demand decrease in the wake of $70 oil price may be transient, as oil consumers’ behavior will return to the old habit at a time when the oil price has gone back to $50. Moreover, with oil at $50 and corn price near record high the production of ethanol becomes unprofitable and provides a disincentive to provide an alternative source of energy. In other words, the rationales for shorting the market at $70 are no longer viable once the market falls to $50.
Moreover, the economy stays healthy, as the core CPI increased by a modest 0.2% in December, and the preliminary reading of the Univ. of Michigan Consumer Sentiment Index for Jan. rises from December’s to 81.3 to 98, the highest since the 103.2 reading in Jan. 2004.
All these factors contribute to a battleground for the bulls and bears at $46.20-$54.86. The CFTC’s COT report shows that for the week ending on Jan. 9, the non-commercial interests had gone from a net long of 2,194 contracts to a net short of 22,358 contracts, a whopping change of 24,552 contracts amidst an increase of 53,651 new open contracts. But in the following week ending on Jan. 16 the net short interests fell by 20,326 contracts to merely 2,032 contracts amidst another huge increase in open interest by 37,088 contracts. In a matter of two weeks, the open interests have increased from 1,226,641 contracts to 1,317,380 contracts for a 7% increase. In other words, as the longs are convinced that the market is going to turn at this moment, the shorts are sitting tight waiting for the next leg of downward movement. The sharp increase in open interests in the past two weeks explains the volatile market movement both intraday and during the two-week period. Likewise, when either the longs or the shorts decide to bail out, the market movement will be equally volatile.
Crude Oil Market Analysis’ observation of the increasing appetite by speculators in crude oil is contrary to the conventional wisdom that big speculators have shifted their money from energy and metal to agricultural products. Nevertheless, Crude Oil Market Analysis is concerned only with the fact, not with market perception, and the fact is that both the bulls and the bears are coming in, each holding firm their respective position.
Technically, despite today’s $1.59 rebound, it is too early to say that the market downward momentum has stopped. The market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term. If the market cannot stay above $54.00, it will again test and break the $50.00 support. The break of the $50.00 support is not an indication of any kind. What is telling about the market direction is whether there will be a follow-through. Here Crude Oil Market Analysis will quote an earlier analysis from Jan. 9 to end today’s analysis: “Today the market finally broke the 2006 low of $54.85 and had a follow-through selling of almost $1.00 to a low of $53.88. This $1.00 follow-through selling shows that the drop to $53.88 was not a normal panic selling triggered by stop-loss orders, but that there were new shorts coming in after the market broke the support. In other words, the market wanted to go lower.”
Strategy: Sell at $53.80 with a stop at $55.05; take profit below $51.00.
Dr. Chen
The market moved in one direction from the overnight low of $51.48 to close at $53.40 for a $1.59 gain.
Currently the market is still very dynamic, as speculators play an “I-dare-you” game.
Fundamentally the market remains weak. The IEA reported on Jan. 18 that the oil demand in the 30-member OECD countries in 2006 fell for the first time in 20 years by a nominally insignificant 0.6%; however, the demand indeed decreased in 2006 in response to the record-high oil price. Oil demand in developed countries, however inelastic, finally responded to high prices when the price reached above $70 as oil consumers began to seek alternative sources of energy such as ethanol.
In addition, the IMF forecasts that Nigeria will spend $1.25 billion improving the oil-rich Niger River Delta in the run-up to April’s presidential election. Such spending will ease the tension in the region and bring Nigeria’s crude oil production from 2.35 million barrels per day in 2006 to 2.53 million barrels per day in 2007.
However, the demand decrease in the wake of $70 oil price may be transient, as oil consumers’ behavior will return to the old habit at a time when the oil price has gone back to $50. Moreover, with oil at $50 and corn price near record high the production of ethanol becomes unprofitable and provides a disincentive to provide an alternative source of energy. In other words, the rationales for shorting the market at $70 are no longer viable once the market falls to $50.
Moreover, the economy stays healthy, as the core CPI increased by a modest 0.2% in December, and the preliminary reading of the Univ. of Michigan Consumer Sentiment Index for Jan. rises from December’s to 81.3 to 98, the highest since the 103.2 reading in Jan. 2004.
All these factors contribute to a battleground for the bulls and bears at $46.20-$54.86. The CFTC’s COT report shows that for the week ending on Jan. 9, the non-commercial interests had gone from a net long of 2,194 contracts to a net short of 22,358 contracts, a whopping change of 24,552 contracts amidst an increase of 53,651 new open contracts. But in the following week ending on Jan. 16 the net short interests fell by 20,326 contracts to merely 2,032 contracts amidst another huge increase in open interest by 37,088 contracts. In a matter of two weeks, the open interests have increased from 1,226,641 contracts to 1,317,380 contracts for a 7% increase. In other words, as the longs are convinced that the market is going to turn at this moment, the shorts are sitting tight waiting for the next leg of downward movement. The sharp increase in open interests in the past two weeks explains the volatile market movement both intraday and during the two-week period. Likewise, when either the longs or the shorts decide to bail out, the market movement will be equally volatile.
Crude Oil Market Analysis’ observation of the increasing appetite by speculators in crude oil is contrary to the conventional wisdom that big speculators have shifted their money from energy and metal to agricultural products. Nevertheless, Crude Oil Market Analysis is concerned only with the fact, not with market perception, and the fact is that both the bulls and the bears are coming in, each holding firm their respective position.
Technically, despite today’s $1.59 rebound, it is too early to say that the market downward momentum has stopped. The market needs to close above the 2006 low of $54.86 to vindicate that $50.00 is the floor in the near term. If the market cannot stay above $54.00, it will again test and break the $50.00 support. The break of the $50.00 support is not an indication of any kind. What is telling about the market direction is whether there will be a follow-through. Here Crude Oil Market Analysis will quote an earlier analysis from Jan. 9 to end today’s analysis: “Today the market finally broke the 2006 low of $54.85 and had a follow-through selling of almost $1.00 to a low of $53.88. This $1.00 follow-through selling shows that the drop to $53.88 was not a normal panic selling triggered by stop-loss orders, but that there were new shorts coming in after the market broke the support. In other words, the market wanted to go lower.”
Strategy: Sell at $53.80 with a stop at $55.05; take profit below $51.00.
Dr. Chen
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