CRUDE OIL RETREATS $1.00
Traders eye opec comments, fund positions
Crude oil, the recent leader of the petroleum complex to the upside, is seeing some selling pressure today following comments by OPEC leaders overnight and in combination with Friday’s release of CFTC data showing near record fund length still present in the market. In an interview with the Reuters news agency Sunday, OPEC President Mohammed al-Hamli said Sunday that the group is concerned about current high oil prices and their impact on the world economy, leading some to conclude Monday that OPEC may act in response to the rising cost of crude. A separate source within OPEC stated the group thought a fair price for crude was in the $60 to $65 range. OPEC leaders to date have maintained a stance that high oil prices were the result of downstream refining capacity constraints, and not due to a lack of crude oil. While any real action on increasing the cartel’s output would likely have to wait for the group’s next scheduled meeting in September, today’s comments were enough to prompt some long traders to move to the sidelines.
Those traders have become increasingly cautious following CFTC data on large commodity funds, which when released Friday showed the combined spec/fund positions (futures & options) for crude oil to be net long 149,338 contracts and within 5% of the record net long position. That length, both in crude oil and gasoline, leaves the market in a vulnerable position to any bearish headlines.
Following a poor chart close for the products last week, weakness in crude (as we have seen so far this morning) removes the key price support mechanism levering the petroleum complex in recent weeks. In effect, with funds holding large net longs, crude will now have to prove that it is capable of maintaining its uptrend to avoid a larger round of wholesale liquidation by the fund community, as product values (RBOB, HO) have provided no support of late. Today, that leadership/support is being called into question. A sharp pull back in the U.S. stocks market and news China raised interest rates on Friday has affected the energy demand outlook. A report showing China’s implied oil demand grew by only a 2.1% annual rate in June (although imports were up 20%) seems to be undermining bullish sentiment a bit.
Net fund positions vs. prince, Nymex crude oil
On the product side, even though last week’s surprise drawdown in gasoline stocks certainly gave the bears something to think about, we also suspect traders are skeptical that the 2.2 million barrels stock decline in gasoline is the start of a trend. Several refineries came back on last week and it appears the trade is anticipating a rise in gasoline stocks in this week’s inventory report. That expectation can be seen in the continued downtrend now evident on the RBOB chart (below).
According to United Energy: “RBOB was able to confirm the doji star top from Thursday with the pull back on Friday. The bulls now face a rally or else scenario. Peg 21327-21090 as key support. If the bears can take out this zone, we expect a retest of the previous 20788 low. Based on the price action at the beginning of last week our target in WTI became 7537. Has WTI peaked out? We would like to see a sell off today to even begin thinking a top has been put in place. If the bulls can keep the momentum, going the next potential target to the upside is 7735. Oil failed into key resistance the past two days at 21175. If the bears can regain control of the market 20445 is the hurdle they must push the market through in order to confirm the trend as down.”
What becomes quickly apparent is that we are already closing in the key technical support levels above (2.1090 RB, 2.0445 HO). Further, knowing that many of the commodity fund mangers are trend and technically orientated makes for an even more nervous trading community.
That expectation aside, U.S. gasoline demand remains right at record levels and high domestic refinery production for gasoline and rising refinery capacity have yet to build any sort of stocks cushion. The ability to do so remains highly dependant on imports, and thus susceptible to supply shocks. On the geopolitical front, though all has been quiet, the market remains wary of supply disruptions in Nigeria, is watchful of developing situations in the Middle East and is poised for changes in the Iran/UN controversy over Iran’s nuclear programs. Weather also remains an undercurrent though thus far the Atlantic Hurricane season has been a quiet one. Spill over effects of price pressure on crude/gasoline will likely effect heating oil as well, but with much less fund exposure (only moderate length), heating oil stocks close to record lows and overall distillate stocks still on the decline (deficit to last year widening), we would expect better support for heating oil values near last week’s lows (2.03).
In general, expect the energy complex to accept some additional selling in the coming days as funds continue to pare back exposure. Values should stabilize just above key support levels (discussed above) prior to Wednesday’s EIA data.
Natural gas
Natural gas futures are starting the week on a very weak note. Forecasters were calling for above normal temperatures to persist across the East coast this week, which created some bullish momentum. However, as has been the case for the majority of this summer, the experts are now calling for the heat looks to underperforms in the East.
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