Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Crude Oil Breaks The Dollar Rule For The Summer High Noon

Commodities / Crude Oil Mar 08, 2010 - 04:08 AM GMT

By: Dian_L_Chu


Best Financial Markets Analysis ArticleCrude oil surged to its highest level in almost eight weeks and gasoline also rose to a 17-month high after the U.S. employment declined less than forecast in February. Encouraged by the upbeat news, investors moved into oil on the expectation that fuel demand will climb as economic growth picks up pace.

Extending the impressive gains of 9.3% in February, crude oil for April delivery settled at $81.50 a barrel on the New York Mercantile Exchange (NYMEX), the highest closing price since Jan. 11. The contract jumped 2.3% in last week alone.

Positive statements from China that it would maintain its economic stimulus, rekindling hopes for accelerating growth to drain excess oil supplies also helped support the oil market.

Moving On Up Via Currency?

New York crude has been trading in the $69-$83 range since late September as uncertainty over the global economy has contributed to several failed rallies. The close above $81, capping a 14.5% increase from a year-to-date low last month, sparked speculation that oil could be targeting $85 in the near term.

Now, some traders and analysts say currency movements may play an important role in pushing prices beyond those limits.... or will they?

Breaking The Dollar Rule

Much of the movement in oil over the past year was driven by overall fund flows out of the U.S. dollar as opposed to supply and demand fundamentals of the commodity. Dollar weakness tends to boost dollar-denominated commodities, which has characterized the relationship between crude and the dollar for most of last year. (Fig. 1)

However, just as the Greece debt crisis negatively impacted the euro pushing gold and the US dollar to trade in tandem (see analysis), the dollar’s no longer in the driver’s seat dictating the direction of crude prices, as crude and the dollar have both advanced since last December. (Fig. 1)

This break in the pattern suggests this year could be a transition where broader market fundamentals begin to take hold, with weekly inventory levels and demand trends becoming a larger factor for the energy market.

Down The Contango Spread

Meanwhile, the forward curve has flattened out considerably. The spread between the near-month oil in relation to the 12-month forward contract has dropped from $8.32 per barrel three months ago to the current level of around $2.50 per barrel (Fig. 2).

Tanked The Floating Storage

This narrowing of the contango spread is reflected in the tankers market as well. Since storing oil has actually become less lucrative in recent months, estimates show that floating inventories have been falling just as demand picks up.

Though the floating storage data is sketchy at best, Bloomberg reported the number of tankers used as floating storage for crude oil and diesel fell 20% in January, based on a Feb. 8 report from Simpson, Spence & Young Ltd., the world’s second- largest shipbroker.

Meanwhile, figures presented by Gibson showed 112 ships were storing crude oil and clean products globally by February, down from a high of 149 ships at the end of November.

As for the number of barrels, recently Goldman Sachs calculated that total stored hydrocarbons at sea, including barrels in transit, fell to 636 million barrels in January versus 660 million barrels the previous month. Whereas Research firm JBC Energy estimates some 40 million barrels of middle distillates, such as diesel, stored at sea had been drawn by the end of February. That leaves another 60 million or so still floating out there.

Strong Buy Side Sentiment

Crude oil prices have also moved in very close unison to stocks and economic sentiment for the last year or so (Fig. 1). It seems investors appear ready to call the worst over as equity investors and oil speculators have both been diving into buying mode.

The disclosure that China’s sovereign wealth fund was the fourth-largest investor in the US Oil exchange traded fund (USO), and the spat between Argentina and Great Britain over oil drilling near the Falkland Islands add only additional enthusiasm to an already bullish market psyche.

Buying interest in riskier assets, including oil, should only pick up with more positive economic data coming forward.

Riding Into The Summer High Noon 

The latest weekly data showed U.S. inventories of crude oil climbed to their highest level since August and are still 5.7% above the five-year average. But traders said the market may be ignoring the inventory build because more than half of it occurred in PADD 5 on the U.S. West Coast, where the distribution system is isolated from the rest of the country.

Nevertheless, refinery operating rates climbed to almost 82% at the end of February, the highest level since October, bolstering demand, while total average fuel demand over the past four weeks was up 3% from a year earlier, according to the U.S. Energy Information Administration (EIA) report on March 3.

The EIA now expects the crude oil market to strengthen again this spring with West Texas Intermediate (WTI) rising to an average of about $81 per barrel over the second half of this year and $84 per barrel in 2011.

JPMorgan Chase & Co. (JPM) also raised its 2010 forecast for crude oil partly because of reduced inventories in floating storage. JPMorgan now expects WTI crude oil to average $83.50 a barrel this year, up from their previous forecast of $78.25. JPMorgan also increased its outlook for global oil demand by 110,000 barrels a day to 86.3 million barrels a day.

With the summer driving season coming into play, this demand-side pressure should give impetus to higher oil prices over the next 4 months.

Technically Speaking

The new development of settling above $81 on NYMEX has left the commodity sitting just below its 2010 high of $83.93. A break above this price point will trigger some buying pressure, and will initiate the next leg up to around the $87.00 levels. A decisive clearance of that level will put the commodity on the path to further upside gains toward the key psychological level at $95.00. (Fig. 3)  

On any pullback, the Feb. 22 high of $80.75 is expected to provide the next level of support, thus turning crude oil back up again. If this level of support fails, crude should find support at the Feb. 25 low of $77.02.

OPEC Puts Floor at $75

The Organization of Petroleum Exporting Countries (OPEC) is scheduled to meet in Vienna on March 17. Saudi Arabia’s King Abdullah has targeted $75 a barrel as a fair price for consumers and producers. This suggests $75 to be essentially the floor that OPEC would defend.

Oil prices should continue to rise during the summer driving season with the yearly high established near the July 4th holiday. After that, many factors will have to be weighed such as, the Federal Reserve Policy, inflation concerns, the unemployment rate, consumer sentiment, global growth, and geo-political issues.

Furthermore, with paper currencies all over the globe losing their value, commodities such as oil will remain an investment favorite with major capital inflows over the next 5 years.

"Cycles of shortage and surplus characterize the entire history of oil."  ~ Daniel Yergin 

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules