Crude Oil Outlook: Our Short Term Bullish Stance

NYMEX crude oil and its follower ETFs shot 4 for 4 last week in higher closes as crude trumped $65 a barrel. Nearing 6 month highs, the July NYMEX contract gained an impressive $4.64 per barrel or 7.5% in the abbreviated trading week. As we predicted in last week’s report, OPEC shied away from any additional supply cuts.

Poor housing numbers early Tuesday caused spot crude to weaken and dip below $60 before the Consumer Confidence Index reported its data for May at 10am. The Index jumped from 39.2 in April to 54.9 in May, beating out estimates of 42.6. It was the highest report since last September and a huge leap from 25.3 in February.

This news caused both NYMEX spot crude and the S&P to rebound sharply. The DOE numbers that usually are reported Wednesdays at 10:30am were delayed until 11am on Thursday because of the shortened week. Per Thursday’s report and for the third week in a row, a draw on crude inventories was recorded. A reduction of 5.4 million barrels of crude was announced. With supply still at 15 year highs (363.1 MMbbls), we are swimming in oil.

Despite ETFmarketintelligence's short term bullish stance in crude oil and its tag-along ETFs, we have recently come across a technical indicator that may warn of the current upward trend getting ahead of itself. The RSI, or Relative Strength Index, is an indicator that incorporates “Up” and “Down” days among other things to help predict price movement. An RSI below 30 is considered oversold and an RSI above 70 is seen as overbought.

As of last Friday’s close in July NYMEX crude, an RSI of 73.74 was recorded. Use caution trading DTO for the time being as it managed to shed almost $32 or 28% in share price as crude climbed above $65. In USO, investors have been redeeming shares (pulling out) over the past few weeks, reducing the funds' assets from over $3 billion a month ago to $2.8 billion as of last Friday. On the other hand, USO was in sync with NYMEX spot crude’s performance last week.

Comments

[WACG:]

RSI is a useful indicator only until it is not. As with ALL technical "analysis" indicators, using it is driving by looking in the rear view mirror. Any blogger, commentator, or other wag that mentions "technical analysis" in their emanations raises several red flags in my mind - but have fun.

Jun 03 09:05 AM

[RiskReturnO...:]

XLE remains the best trade for more conservative investors. It's still trading at levels consistent with $55 crude oil ... as long as crude stays in the $60-$65 range, you have a great risk-reward owing XLE (with covered calls to get extra premium "income"), as your "margin of safety" is around 10-20% factoring in "discount" to crude + call premium as hedge.

Jun 03 10:43 AM

[Sober Realist:]

The EIA publishes its weekly stock numbers on oil and other petroleum products each Wednesday. www.eia.doe.gov/oil_ga...

or you can look at the raw numbers here:

tonto.eia.doe.gov/oog/...
(Click on the Data 1 tag)

This week analysts thought stocks would drop by some 2 million barrels. Instead they increased by 2.866 million.

May 29, 2009 365.977 million bbls
May 22, 2009 363.111

That’s a 5 million bbls error which is huge. But it doesn’t begin to capture just how insane the oil market really is. This is the crude oil stock number from last year at this time.

May 30, 2008 306.757 million

We are currently carrying 59.22 million bbl more this year than last year. This is in large part due to the fact that the economy is doing so much worse this year. But that is rather the point. Supply is through the roof. The economy sucks, and the near oil crude future has doubled from its low of $30.28 which it hit on December 23, 2008 at the bottom of its collapse from the previous speculative binge, --or if you prefer the 2009 low, $34.03 on February 12, 2009.

tonto.eia.doe.gov/dnav...

What this screams is manipulation. It is a subsidy for oil producers, a windfall for investment banks, and a hidden tax on already cash strapped American consumers.

Jun 03 03:51 PM

[Larry House:]

To each his own, but on oil, I am bearish short term and bullish long.

Jun 03 08:38 PM

[Child Psych...:]

Stephen:

Were you not stating in late February that WTIC was going to 20? I am not criticizing you for being wrong, but I am concerned that you may be pumping your own positions. Could you please clarify?

Jun 03 10:13 PM

[buyforeclos...:]

Goldman is corrupt as hell raising crude price estimates and for what? So they and their collaborators can cash in on speculation. That is exactly what happened in 2008 when Oil was at 148....bunch of crooks and we need a special SEC unit to prevent this. The economy will have trouble coming back with higher oil....in fact if gas prices go too high I short thje market and then short oil

Jun 04 09:22 AM

[buyforeclos...:]

stephen he just is going with the trend... as am I ..I doesnt make sense but dont let that stop you from making money....short oil if the impact of it staves off recovery in US and it very well may...I will go long and then go short after summer if the economy is not getting better... in the meantime cash in on these criminals manipulation

Jun 04 09:24 AM

[buyforeclos...:]

Last thing...Oil rally is purely based on Dollar weakness. There is no other possible reason for it at this point in time. People want copper, gold, all commodity hedges..although inflation is quite aways down the road in my opinion. Wall St does what ever it wants and makes money both ways long and short, you just have to try and follow the money and its not easy

Jun 04 09:26 AM

[Michael Eis...:]

i took profits on OLO and DXO at end of last week. i think Crude is a good long term bet but fear the short term could be ugly.

Jun 06 04:42 PM