Daily Oil Prices 31 July 2009

Yesterday’s dramatic reversal in the fortunes of daily oil prices can only be described as “bizarre” as there is no logic than can be applied either technically or fundamentally to a move of such magnitude.   The fundamental picture has not changed as the world is still awash with oil and oil products which, even if demand were to turn upwards, will still take time to work through the system.  One explanation we can apply is that with equity markets determined to hold onto recent gains and speculating that recovery is very much on the horizon the oil market is factoring in such a scenario.  Of course our good friends at Goldman Sachs can always be relied upon for a plausible explanation, their latest being that the recent weakness in crude fundamentals is  only “temporary” and that they are still calling for crude oil prices to be at $85 dollars a barrel by year end.  In addition the oil market was also reassured by the Bank of China’s declaration that it would continue with its loose monetary policy and continue its lending programme.  Given that the Bank of China is probably one of the few banks with any money to lend it’s no wonder the markets responded so strongly.  In addition yesterday’s move was not accompanied by any major weakening of the US Dollar as the Dollar Index moved sideways for most of the day, and with no large swings in Dollar sentiment  other commodities such as gold and silver only posted  minor moves higher.  Finally there is always good old fashioned market manipulation which is ironic given the current CFTC hearings!   From a technical perspective (although I am not sure whether this has any validity given the above), yesterday’s  wide spread up candle completely obliterated the losses of Wednesday, closing back above both the 9 day and 14 day moving averages and only marginally below the 40 day, creating in effect a two bar reversal, from which one would expect a move higher.  Given the above analysis, and the fact that it is both month end and the weekend it may be prudent to step aside from any oil trading today and wait for next week.  If this is a true move, then we need to see a test of the strong resistance above, and a breakout out in due course. If it is false (as I suspect) then we will see a continuation of a move lower following the bearish signals and break below all three moving averages of Wednesday.  Overall crude oil closed the session at $66.94 per barrel, trading between a high of $67.29 and a low of $62.76.  Have a great weekend!

The short term is bearish, medium term sideways, long term bullish.

WTI:

Support:    $65.48   (low of  03/07/09)                           Resistance: $68.85    (high of  28/07/09)

Support:    $64.74   (low of  29/05/09)                           Resistance: $68.68    (high of  01/06/09)

Support:    $64.38   (low of  23/07/09)                           Resistance: $68.22    (high of  24/07/09)

OIL (BRENT):

Support:    $69.07    (low of 28/07/09)                           Resistance: $ 71.96    (high of 19/06/09)

Support:    $68.69    (low of 24/07/09)                           Resistance: $ 71.36    (high of 28/07/09)

Support:    $68.10    (low of 29/06/09)                           Resistance: $ 71.20    (high of 10/06/09)

Oil Price Chart 30 July 2009

Daily oil prices reacted badly to yesterday’s reported crude stock build of more than 5m barrels – not entirely unexpected given Tuesday’s bearish API numbers, with crude prices touching a low of $62.70 per barrel before ending the day at $62.96 per barrel.  As usual this dramatic fall was aided and abetted by a consequent strengthening of the US Dollar and, with the exception of the Shanghai composite, most equity markets did manage to hold onto their recent gains.  However, the decline in the Shanghai Composite of almost 7% is worrying given that back in 2007 it was such a fall which heralded the start of the current financial meltdown.  From a technical perspective yesterday’s wide spread down bar on the daily oil chart, firmly validated the bearish engulfing candle which we analyzed in Tuesday’s commentary for daily oil prices, closing the oil trading session having breached all three moving averages during the day – a worrying sign for oil bulls. What is clear from yesterday’s price action is that the $69 – $73 price point is now a solid object in the way of any future move higher for daily oil prices, and secondly that the move lower has considerable momentum, given the spread of the candles over the last two days. In addition the fall pierced the moving averages which provided little in the way of any support, suggesting that the rally of the last two weeks has now come to a shuddering halt, crushed under the weight of the change in market sentiment.  As with many other commodities which have suffered a similar fate in the last two days, such as gold and silver, the key will be whether the various technical support levels now coming into play, will provide any solid foundations, or simply be blasted out of  the way as  oil prices power lower. The first of these is now firmly in sight at the $61 per barrel price level, and should this fail to hold then a deeper move to the $59 price handle is likely. If this level is breached then a return to the $52 per barrel price point is likely in the medium term, and should oil prices reach this level again then this should provide the platform for any re-basing in daily oil prices.

The short term outlook is bearish, the medium term is bearish and the long term is sideways

WTI:

Support:    $62.69  (low of 29/07/09)                             Resistance: $65.46   (high of 06/07/09)

Support:    $62.17  (low of 07/07/09)                             Resistance: $64.91   (high of 20/07/09)

Support:    $61.04  (low of 17/07/09)                             Resistance: $63.99   (high of 17/07/09)

OIL (BRENT):

Support:    $66.14   (low of 29/07/09)                            Resistance: $ 68.55   (high of 02/06/09)

Support:    $65.84   (low of 04/06/09)                            Resistance: $ 67.92   (high of 21/07/09)

Support:    $65.49   (low of 01/06/09)                            Resistance: $ 67.48   (high of 22/07/09)

DOE Stats (change in millions of barrels)

Crude   +5.1 (-1.2)        Distillates  +2.1  (+0.9)         Gasoline  -2.3   (-0.1)

Oil Chart 29 July 2009

Yesterday’s API figures appear broadly supportive of today’s EIA forecast numbers but only to the extent that here too stocks of distillates are expected to increase and refining capacity decrease.  API data showed distillates increasing by 117k barrels while today’s EIA numbers are expected to show distillates increasing by almost 1m barrels.  Whether these bearish fundamentals will be ignored by the oil market remains to be seen but from a technical perspective Monday’s shooting star candle, which was the first signal of potential weakness in the recent recovery of daily oil prices, was indeed confirmed yesterday as the price of crude fell sharply, closing the oil trading session with a wide spread down bar.  As outlined in yesterday’s oil market analysis, we now need to see whether this is simply a short term market correction, following the recent rally in oil prices, or a longer term reversal, and much of this will depend on whether the strong resistance created during the consolidating price action of June, holds firm.  This was indeed the case yesterday, with an initial attempt to move higher promptly squashed, as the price of oil failed to make any headway into this strong congestion area, with the high of the day failing at the same price level as on Monday. Should we see the reversal continue, then any break and hold below the 14 day and 40 day moving averages will signal a much deeper move, possibly as far as the $60 per barrel price point once again. For the time being, the recent rally now seems to have run out of steam, and for any move higher we will have to wait for a break and hold above the $72 per barrel price level.

The short term outlook is bearish, the medium term is sideways and the long term is bullish.

WTI:

Support:    $64.96  (low of 03/06/09 )                             Resistance: $68.85  ( high of 28/07/09)

Support:    $64.38  (low of 23/07/09)                              Resistance: $68.22  ( high of 24/07/09)

Support:    $63.98  (low of 21/07/09)                              Resistance: $67.48  ( high of 23/07/09)

OIL (BRENT):

Support:    $68.05  (low of 25/06/09)                              Resistance: $71.20  (high   of 10/06/09)

Support:    $67.58  (low of 24/06/09)                              Resistance: $70.81  (high of 26/06/09)

Support:    $67.05  (low of 02/06/09)                              Resistance: $70.46  (high of 24/07/09)

DOE Stock estimates (change in millions of barrels)

Crude  -1.2       Distillates  +0.9        Gasoline  -0.1