The oil surge is alive and well. An emotionally charged market sentiment once again discounted all of the bearish aspects of the oil inventory report as well as the fact that OPEC did not cut production. Up until yesterday, the only market discussion was whether OPEC would cut production or agree to a rollover agreement. The consensus opinion was they would rollover their existing agreement. They did, but the market quickly turned very bullish on the news that they did not increase production.
Then the inventories came out and showed a surprise decline in crude oil stocks but a larger than expected build in gasoline. Crude oil stocks remain below last year but still above the normal, five-year average. On the other hand, gasoline stocks are now about 18 million barrels above last year’s record high level and almost 20 million barrels above the normal five-year average. The market only focused on the crude draw.
As we discussed in yesterday’s report, if the market ignored all of the bearish news it would be off to the races again. That is exactly what happened as we hit record highs across the board in the complex. The fact that the U.S. dollar continues to trade near record lows vs. many currencies is also fueling the surge in oil and most other commodity prices. So for now we see the current trading pattern continuing with the potential for a significant downside correction at any time.
As we have been recommending from the speculative side one can only trade this market from the long side with tight trailing stops so as to not get caught in the downdraft when the correction really occurs. From a purchasing side hedging perspective, we continue to recommend using only option strategies, either buying outright calls or entering in debit call spreads so as to be in a position to participate in lower prices during a correction.
It is hard to say what is going to be the primary catalyst that will finally cap the current price move. However, with the U.S. economy still projected to remain weak, as per the Fed remarks just yesterday, a high oil and commodity price environment is going to impact the economy negatively adding further downside pressure on economic growth and thus oil demand growth. The complex remains in a bubble atmosphere with seemingly no end in sight. Caution remains the keyword.
Currently crude oil is making new all time highs in early trading.
Current Expected Trading Range
3/6/08
Change
Upper
Lower
From
Resistance
Support
6:03 AM
Yesterday
Apr WTI
$105.32
$0.80
$110.00
$99.20
Apr HO
$2.9412
($0.0019)
$3.0000
$2.7100
Apr RBOB
$2.6476
$0.0055
$2.7000
$2.5200
Apr NG
$9.740
($0.001)
$9.800
$8.700
Dominick A. Chirichella
Energy Management Institute
dchirichella@emimail.org
www.energyinstitution.org
www.advancedenergycommerce.com
