We asked traders if crude is riding the bull
Alan Rohrbach @MacroMeister
Crude oil has definitely NOT entered a new bull market.
First, there is Saudi Arabia’s need to continue to pump at the lower prices they created, if for no other reason than to meet their Brobdingnagian social spending needs. That goes for the other producers as it regards their government fiscal needs as well. This is even the case for the producers who are not making money at present compared to their longer term cost of production.
Speaking of which, that drop below the cost of production has been a psychological support for the price due to lower rig counts. However, what that does not take into account is the degree to which producers are rightfully mothballing their least efficient, less profitable wells. As such, the drop in production is nowhere near what the percentage reduction in rigs might suggest.
The lead contract Nymex crude oil future is a study in false hope. At the end of April it pushed above the key $58.30 level (a major Fibonacci retracement resistance from the September-March debacle). While it managed to hold above it for the past several weeks, this week’s failure back below it speaks volumes.
Unless it can sustain activity back above $58.00 soon it will continue lower. A drop to the interim $54.00-$53.00 congestion may be in order, or even a retest of the historically more major $51.00-$50.00 area.
Image via flickr