The Oil Report: Short Covering Rally Under Way

Oil rebounded sharply after Barack Obama pledged the biggest U.S. public works program in about 50 years to revive the economy. This plan includes spending on roads, bridges and repairing school buildings and will boost raw material demand.Oil had fallen for the last six trading sessions and rose yesterday for the first time in seven days, gaining as much as 7 percent, even though oil`s performance is still way down in all time frames.

Oil`s Performance

1 Week: -10%

1 Month: -28%

3 Months: -58%

6 Months: -68%

1 Year: -48%

OPEC Cut

Libya’s top oil official, Shokri Ghanem, said yesterday that OPEC should make a “substantial” output cut at its meeting next week, reiterating the words from OPEC`s President Chakib Khelil during the weekend. The Organization of Petroleum Exporting Countries pumps more than 40 percent of the world’s oil.

Word on the Pits

Kevin Tuohy a trader at MF Global:

Commodities rise is more equity influence than anything else.

It’s still too early to say whether the rebound is a dead-cat bounce or that commodities have found a base.

Tetsu Emori, Tokyo-based manager of Astmax Commodity Global Macro Fund:

The oil price is now on the brink of an abyss.

Even if the cartel makes a substantial production cut, it won’t be enough to lift oil prices back up to the $60 mark if we see more drops in U.S. consumer spending.

David Moore, commodity strategist with Commonwealth Bank of Australia in Sydney:

The possibility of OPEC moving to tighten up the oil market is real.

What Will Move Oil in the Next Few Days

• Stock Markets: If stocks continue to trend higher it should help oil prices
• The Dollar: If the dollar weakens further, oil might continue its up move

Disclosure: no positions

Comments

[Crude Oil Trader]

We have enjoyed playing the DTO [short crude] for months now. Must admit we are playing it a little cautious now. It looks like we have a new trading channel, but that doesn't mean crude has bottomed. We have called for the SP to flush out in the 600-650 range in January and look for crude to bottom then. After that, say hello to inflation and high oil prices with the dollar falling apart.


Great post Henrique!

2008 Dec 09 12:26 PM

[XRTrader]

Examine the finances of the OPEC countries, and you'll quickly realize the oil prices they need are (at minimum) in the low 50's (although it varies considerably per country); expect big "shocking" production cuts to be announced next week.

This, along with resolution of the contango, short covering, and the currently oversold position should lead to a relatively quick 20% + bounce in oil prices.

Although prices could retest bottoms in the mid-30 level in early january, i think shorting oil at this level carries more risk then reward.

2008 Dec 09 09:01 PM