Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Crude Oil to Break New 52-week High

Commodities / Crude Oil May 02, 2010 - 06:36 AM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleThe RBOB gasoline contract finished the week very strong and was the main driver for crude oil`s stellar bounce off the Euro zone downgrade which sparked a selloff earlier in the week. Crude oil rose to a three-week high and gasoline surged as a report showed the U.S. economy grew 3.2% in the first quarter on strong consumer and business spending.


Crude oil for June delivery closed at $86.15 a barrel on the New York Mercantile Exchange (NYMEX), the highest settlement price since April 6. Futures climbed 2.9% in April for a third straight monthly gain. Gasoline for May delivery also climbed 1.7% to $2.3963 a gallon, the highest settlement since Sept. 30, 2008.

Crude was also helped by the Fed FOMC decision to keep the statement language and associated monetary policy highly accommodative. This encouraged investors to pile into crude with a renewed risk appetite.

Contango & High Inventory

The latest weekly inventory report was positive regarding gasoline demand, but the rest of the EIA report was pretty bearish. Crude inventories increased by 1.9 million barrels, or half a percent, to 357.8 million barrels, but is 3% below year-ago levels. (Chart 1)

U.S. gasoline consumption average over the past four weeks rose 3.1% year-over-year. Demand for the fuel was the highest since September. At the same time, U.S. refineries ran at 89% of total capacity on average, a jump of 3.1% from the prior week, while analysts expected capacity to drop to 85.72%.

Fundamentals will matter at some point, but that point will be reached only when we are swimming in stored inventory, and tanker storage becomes entirely cost prohibitive. However, we are still a long way off that point as the crude market is in Contango. And there are still plenty of tankers available to store oil that would otherwise be flooding the market.

High Open Interest Raises Overvalue Concern

Bloomberg reported that oil volume on last Friday on the NYMEX was 27% higher than the average of the past three months. Open interest was 1.41 million contracts, the highest since June 11, 2008.

Some analysts think the high level of open interest raises concerns about whether the market is overvalued relative to fundamentals and whether the upward price trend can continue.

Crude Now Has a High "P/E Ratio"

Indeed, crude is a very volatile commodity and a $2-swing is the norm these days. Factors affecting crude`s volatility are the Euro-USD currency cross, equities rise or fall, global economic news, and to some extent inventory levels, with the a rare case of geo-political news such as Iran injecting a short busting rip higher.

Nevertheless, crude is no longer strictly about the inventory levels, it has become an asset class in itself and trades more like a stock these days, rather than a commodity. That is, when people feel confident bout economic outlook, crude may have a high “P/E ratio” relative to the fundamentals; whereas a perception of uncertainty about the growth prospects globally will send its P/E ratio much lower.

Right now, investors feel positive about the global economy, so crude has a relatively high P/E compared to the market fundamentals including the inventory levels. But an event or series of events that create doubts, like overly aggressive financial regulation, trade-wars, currency and debt crisis, or a significant tightening by the Fed, could send crude oil much lower to a a significantly reduced P/E.

Technical Analysis

Crude oil now just sits below the 52-week high estabished on Apr. 6. With the renewed risk trade back on in crude, crude could test and break out of the $87.50 area this trading week, and establish a new closing high between $88 and $90 a barrel, depending upon if the Euro-zone actually reached agreement on a Greece bailout.

If it fails to blow past this newly established level, expect a pullback to the $85 level, which should provide some solid support. (Chart 2)

Make no mistake, Heating Oil and RBOB Gasoline have both broken out last week as well and will be going higher through the next couple of months, with the RBOB contract leading the way for the CL (crude) and HO (heating oil) contracts.

Bullish Through The Upward Bias

So overall, investors should remain bullish on crude oil for the next couple of months and take any significant sell-offs as entry points to establish long positions through the upward bias--the summer driving season.

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 http://www.MarketOracle.co.uk - 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