Weekly Outlook: Energy Prices on Cusp of Rebound?

Looking at the calendar October is behind us, but the remarkable volatility in the majority of asset classes may continue for the next few months. The good news is that whenever prices move as dramatically as we have just seen, it generally signals that emotion or fear is carrying more weight than the actual logic in the marketplace. This typically means that tremendous opportunities present themselves and for those investors that are able to recognize them can take advantage of irrationally low prices. If commodity markets start to trade on their own fundamentals once again we should start to see select commodities bounce back.

Energy

After 4 consecutive losing weeks December crude oil was higher last week just better than $3. Prices traded as low as $61.30, but by week’s end were closer to $68/barrel. Support comes in at $62 with resistance between $69.50 and $70. We will mostly be looking at the dollar for direction, but on a trade through resistance we could see a quick trade back to $80, so stay on your toes.

December heating oil closed back above $2 after gaining 10.62 cents last week. Much like crude oil, heating oil had a positive showing after 4 losing weeks. Support exists at last week’s low of 1.9089 with resistance coming in at the previous consolidation level and the 20 day moving average at 2.1944. December RBOB was 4.60 cents higher last week, but prices still remain below $1.50/ gallon. Assuming last week’s low holds at 1.3838 we could see a bounce of as much as 20-30 cents if we get a move higher in the energy complex. For now we would caution any trading in the distillates and see no viable reason to have exposure long or short.

The U.S. Department of Energy said that underground supplies of natural gas were up 46 billion cubic feet last week to 3.393 trillion cubic feet. Supplies are now down 3% from a year ago and up 3% from the five-year average. December natural gas closed up 38 cents on the week as we expect prices to make their way towards $7.20 this week. Over the next few weeks we are still expecting a push to $8 and would advise all December positions to be liquidated being there is only 21 days left in the options. Although we have issued no formal recommendations, if getting long one may want to institute some sort of hedge against a further depreciation in prices.

Market Financials

Stocks: October has come to a close, but the damage has been done; the Dow lost 1525 points or 14%, its worst monthly drop ever. The S&P 500 also suffered its worst ever monthly drop of 197 points for a 17% decline. The NASDAQ fell 371 points or 18%. Last week the picture was a little brighter; the Dow ended up 946 points or 11.3% to 9325. It was the biggest one week point gain ever and its best percentage gain since 1974. The S&P jumped 92 points to 969 or 10.5%. The NASDAQ had its best week since April of 01’ rallying 169 points to 1721. As we forecasted last week a significant rally, the market delivered. We would expect to see this continue, but equities may face an immediate test depending on how ugly the NFP number is this Friday.

Bonds: The Fed cut rates last week by 50 basis point to take rates to 1.0%; levels not seen since June of 04’ saying the pace of economic activity “appears to have slowed markedly,” even as inflation is seen moderating. The last 3 weeks have been two sided in the debt market as 30-yr bonds have moved both higher and lower between 113/117. For now support comes in at the mid 112 level, if that level is broken look for a trade down to 111. If that level does serve as support we could see a trade back to 115. Every day last week was lower for 10-yr notes as prices dropped just over 2 basis points and appear to be making their way towards 111’20. We are not comfortable either long or short; generally when rates go down prices go up, but the conundrum here is that scared money is moving in and out of treasuries so currently there is no defined trend.

Comments

[GD:]

On Planet earth, Oil is under $55, and gas un $7. What planet are you on Matthew?

2008 Nov 18 02:56 PM