Has Crude Turned the Corner?

Crude oil's 60% rally from $33.50 is encouraging and may have helped to calm the market, but oil stocks are not following suit. In the same period S&P 500 energy stocks are actually down 4.5%. For several weeks now we have been noticing a discrepancy between the "front" crude contracts and the current contract. Right now they are obviously the same, but historically there has been activity in the front contract that was not reflected in the following months' contracts.

Look below at the two charts. Notice that the current contract, for which the last trade is 4/21, has been mostly flat at $50 in 2009. Earlier this year crude prices became disconnected as expiration drew closer (probably as a result of speculation) and as a result the 50-day average is quite different depending on the historical figures used.

We notice that the 50-day average seems to be an important level for crude prices, and looking specifically at the May contract, that average has started to turn. We will be watching the average, currently $47.62, to help determine the price momentum for crude oil.

Comments

[Mad Hedge F...:]

It's days are numbered. Daniel Yergin of Cambridge Energy Partners says that crude prices will stay in a $40 to $60 range for the foreseeable future. The author of the Pulitzer Prize winning “The Prize”, the best business book I have ever read, believes the recent 26% rally in the stock market is what dragged crude up from $35 to $54. Another downdraft in stocks, or a realization that the recession will be longer than expected, could take crude back to $40 in a heartbeat. Inventories are at a 16 year high, with possibly 80 million barrels at sea, as demand has shrunk from 86 to 83.5 million barrels a day over the last two years. Spare capacity is now huge. Don’t expect to break out of this range until a recovering economy eats into these supplies, and inflation makes its inevitable return. Then all commodities will roar, not just crude.

Apr 06 05:28 PM

[Dissenter:]

so if demand for oil is currently at 83.5 million barrels a day then you are saying there is about a day's worth of oil floating at sea(80 million barrels)? Ummm...doesn't seem like it would take long to work through that.

Apr 06 09:30 PM

[Mistrofan:]

Oil is still ahead of itself. For the kind of economic env. taht we have and we will have in '09-'10 oil should be around $34-$35 right now. While I agree that it might rise in 2010 to $50 and finish the year around $60, still right now is way too high.

Apr 06 11:21 PM

[fatpitch2:]

Don't forget the "supply" side....
Depletion rates are even by conservative estimates 5% or better ...
(Cantarel is dropping by double-digit rates) that's good for cutting production by at least 4M bbl/day off every year...

and it doesn't take a rocket scientist to figure out that with current low prices that capex spending is way down so new sources are not being found and new wells are not getting drilled. Stripper wells are shutting down. All of this activity takes a while to circle around to impact supply due to long lag times ... if may be interesting when we figure it out....

Don't forget that a lot of the oil stored in super tankers and other places is by design - taking advantage of the strong contango pricing of oil... buy now for $35/bbl hold it for 6-month sell it for $65/bbl even after carrying costs... what's not to like?

Apr 06 11:35 PM