Crude: quality over quantity

It’s been going on three years now and Iraq continues to overproduce and undercut the oil market. I feel for Iraq and applaud their comeback from practically nothing to 5mm b/d. They missed out on a lot of money the past ten years and they should be happy to get whatever they can. The tough thing with all of that is they are pissing off all the other producers that have been happily supplying China the past five years. China only wants the best deal, so I can’t blame them, but everyone has to respect the order of things, especially in OPEC. I think that Iraq better get with the program or things might get a little tenuous ahead. In the meantime, I do hope Venezuela is taking notes. Once things get straightened out over there, it’s going to look a lot like Iraq circa 2004. 

Now on to the real reasons we’re seeing the oil price making a move higher the past few days; hedging. Whoa there Tex, stop shooting the U.S. shale producers. It’s not them that are doing the hedging. Most likely, it’s the interest rate book runners. With the Fed expected to raise rates at the June FOMC meeting, we’re seeing more Econo-heads buying oil on the cheap while slowly buying rates before the move. We all know that if the Fed raises rates, the USD will also rally. That means that oil prices will decline. Please hold that “A-HA” moment a second. See, if all the money makes good on rates and the currency move, the oil length is a hedge. The best part of that is that oil moving lower is limited. We know that Funds have flattened out and the worst the move could muster in WTI was a knock back to $45. Even more enticing on that hedge is that higher rates will probably choke the U.S. producer’s rig rampage and dampen more oil stocks here. Then we start to really see those OPEC/Russia production cuts showing up in the stats and the bottom for WTI isn’t even going to come close to $48 including a USD rally. Macro funds now have an easy play to go long rates and USD while hedging a limited downside hedge. And if the Fed doesn’t pull the trigger in June, oil has a decent upside play. Boom. 

Crude: And another month bites the dust. It’s hard to believe that we’re already moving along to the CLM7 contract. We now pivot past the last month of the year and that should be worth something to everyone trying to play the cash and financial markets. We kick off with resistance here at 4966, 5048 and 5135. We’ll look back lower to support at 4880, 4770 and 4685. We’ll also change the lead spread and the front spread moves up to CLM7/CLN7 and starts with resistance at –32, -25 and –13. Support comes back to –44, -57 and –65. Let’s get this week done right and the new contract back in play. Don’t lose your way; follow the Dollar, follow the dream. 

Gasoline: OK laziness has been set aside and I’m moving ahead of the RBM17 contract. We can start with resistance here at 16144, 16360 and 16555. Support looks below to 15970, 15780 and 15582. The front spread moves to RBM7/RBN7. Resistance at +25, +110 and +200. Support to –55, -124 and –190. The RBM7/CLM7 gets resistance at 1860, 1910. Support falls to 1788, 1717. 

Distillate: The calendar keeps us moving and we are focused on the HOM17 contract. We’ll get resistance here at 15275, 15460, and 15665. Support looks back to 15070, 14875, and 14655. The front spread bumps up to HOM7/HON7. Resistance here looks at – 48, +35. Support holds down to –76, -88. The crack moves up to HOM7/CLM7 Resistance at 1511, 1576. Support back to 1439, 1366.

Macro Fundamentals: So there was the “Trump Bump” in the stock market, but now macro traders are focusing on trading the White House volatility. It doesn’t take much to find higher volatility in the oil market or even the stock market, but head to DC for the real action. Catching the news highlights in politics every morning gives you an axe to grind somewhere in the financial markets. Today it’s a slippery game in the USD on sup-posed White House leaks. That’s enough to support another move up in oil, We get Housing Starts (1.256; Permits 1.271) at 8:30 a.m. and Industrial Production (0.4; Cap Utiz 76.4) at 9:15 a.m. ET. 

About the Author

Carl Larry is Director of Business Development Consultant for Oil and Gas at Frost & Sullivan. Follow him on Twitter (@oiloutlooks) or on his website.