Energy report: Crude can't sustain rally

You've got to accentuate the positive, eliminate the negative and latch on to the affirmative, don't mess with Mister In-Between. Oil tried to rally. It really did. It tried to ignore that pesky Mr. In-Between, a place where it seems the market is most comfortable. Oil rallied even as the dollar soared and the British pound plunged. It tried to soar with the stock market and tried to worry about one Iranian oil official saying he would cut off oil supply to Europe. It tried to focus on the positive economic news and ignore the negative. Yet at some point the negative came in and the market realized that the day’s events just were not that bullish for oil.

Take Iranian deputy commander of Iran’s Revolutionary Guards who threatened to cut off Europe’s oil supply. He was probably cranky because he got his bank account frozen. Well that would be great because if they did cut off oil supply to Europe, that would be the equivalent of Iran putting economic sanctions on themselves. That would save a lot of time and effort thank you very much. In a world awash in spare production capacity and excess supply, would anyone really care for too long? The sell off in oil seems to suggest the oil market is saying, “Go ahead, make my day”.

The oil market tried to be positive about the consumer spending number which had a 0.5% increase in purchases and was better than expected but with the ISM manufacturing number falling to 56.5 in February and shy of expectations, did anyone actually increase their oil demand expectations? Now add to that expectations by the surveys that we will see supply increase this week it was getting harder to keep that blindly bullish optimism going. Bloomberg News says that crude inventories probably increased for a fifth week as imports climbed. The Bloomberg News survey showed stockpiles rose 1.6 million barrels last week from 337.5 million, according to the median of eight estimates before an Energy Department report this week. Seven of the respondents forecast an increase and one estimated a decline. It would be the longest stretch of consecutive advances since May. Imports of crude oil increased 6.3% to 9.08 million barrels a day in the week ended Feb. 19, the highest level since October, according to last week’s report.

Now I think that crude supply could fall due to an increase in refinery runs. Last week we saw that refineries operated at 81.2% of capacity. That increase in runs could be the start of a bit of a trend and could give us a surprise draw in oil. As for the rest of the survey, Bloomberg says that it expects stockpiles of distillate fuel, a category that includes heating oil and diesel, probably fell 500,000 barrels from 152.7 million the prior week. As for gasoline, Bloomberg says that analysts were split over whether gasoline supplies increased or declined. Inventories probably rose 50,000 barrels from 231.2 million, the survey showed.

Oil and products continue to trade in well defined ranges. There have been great daily opportunities. Trend traders are frustrated as the bulls or bears cannot score a decisive knock out. We still are predicting an eventually big break to the downside and the market’s inability to gain traction above $80 a barrel is making it harder for the bulls to make their case. Use this strength to put on bearish option plays or perhaps some iron condors.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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