A Rally in Crude Oil Would Not Be a Surprise

On October 24th, I posted a report which noted that crude oil had broken through its 200 day moving average and was likely headed to test its January 2007 lows at $50 per barrel. Wednesday, oil closed at $56.16 to reflect a -13% decline since posting the above mentioned report.

Chart analysis of a 3 day timeframe indicates a high probability of testing support at $49.90. However, caution should be heeded as the rate of oil’s decline is rapidly decelerating and stochastics are extremely oversold. A rally in crude oil would not be a surprise as shorts may be inclined to cover near a fairly solid level of support. In further reference to the 3 day timeframe, support 1 is at 53.03, support 2 is at 49.89, pivot is at 59.29, while resistance 1 is at 62.43 and resistance 2 is at 68.69.

A flight to the safety of a secularly oversold U.S. dollar and concerns of a global recession have led to depressed energy prices. Some investors argue that the supply/demand situation favors higher oil prices. I also agree with this thesis, but as long as fear and perception of an economic recession prevail over the IEA’s prediction of long-term oil prices, energy prices will remain under pressure. The IEA asserts that world energy demand will rise on average 1.6% annually between 2006 and 2030 and attributes this to long overdue investment in energy infrastructure estimated to cost $26.3 trillion through 2030. To make matters worse, the current credit crisis is delaying some of these badly needed projects from coming online.

OPEC, out of concern for falling prices, might implement another cut in supply production to support prices. Such a move could be the badly needed fundamental catalyst to temporarily support or boost oil prices while the global economy stabilizes. Another catalyst down the road could come from China which intends to rev up the pace of its economic growth with its recently announced $586 billion dollar stimulus package.

If oil is able to maintain support at $50, odds favor a bullish retracement. Should oil fail to hold support, then it could potentially test its next support levels between $43 and $40.

Comments

[User 297357:]

You know like in 2010 Stanley Kubrick movie I feel you are wrong.
Fossil energy will go down to $ 25 one of these days.
Things are & have to change.
You'll see Mr. $ defender...

HAL computer

2008 Nov 13 08:45 AM

[john s. gordon:]

opec has an incentive to keep petroleum price low enough to foreclose development of alternatives (such as coal-to-oil @ 38.00/bbl.). unlike july 2008, speculators are not controlling the oil price @ present.
> jack

2008 Nov 13 09:25 AM

[Ferdinand E...:]

Interesting. OPEC has made it clear that they do not want my expert advice, and so I will not attempt to force it on them. Instead I will say that of late I have come to the conclusion that they are as smart as I am, and that's pretty smart. For instance, I know that they did not expect the oil price to reach its present level for many moons, and so they are not gnashing their teeth over the oil price decline. Instead they have concluded that when the oil price starts up again, it is capable of making all their dreams come true.

2008 Nov 13 10:03 AM

[blu:]

At current world wide oil depletion rates, OPEC doesn't need worry about ANY alternative sources coming onstream in a timely fashion to their detriment.
This downturn in oil prices only telegraphs record high prices that will be returning once the economic crisis has morphed into a recession.

2008 Nov 13 11:07 AM