Crude Oil Could Bounce, But ...

By Brad Zigler

The crude oil market's undergone a sea change over the past two weeks. Volume spikes used to accompany "up" days - that is, days in which prices rose over the previous day's close. Currently, we're seeing turnover increase on "down" days.

And there have been some real down days recently. The NYMEX August WTI contract is off $9.48 a barrel, or 13.6%, this month. Though new intraday lows were made Thursday, the nearby contract managed to close on an up note for the first time in eight trading days.

The oil market contango, or back-month premium, has also been expanding, making matters worse for holders of long oil products like the United States Oil Fund (NYSE Arca: USO). The cost of a three-month roll has risen 81 cents a barrel, or 34%, since the end of June.

The rising contango coincides with a backup of oil at the Cushing, Okla., delivery terminus for the NYMEX contract. As interest rates have dipped - the three-month TED spread has come in 6 basis points, to 0.36%, this month - a budding carry trade has developed, offering an 8.9% annualized return.

NYMEX WTI Crude Oil (Aug. '09)

Technically, oil remains weak. MACD is at lows not seen since October of last year. RSI is giving no signs of an upside reversal, though it is approaching the oversold threshold (a primer on these technical indicators can be found at "The Gold Market's Tech Clues").

Pattern watchers had been eyeing the June-July double-top as an indicator that selling pressure might abate at the $59 level. Before 9 a.m. this morning, however, sellers had taken the August contract down to $58.74 before meeting support.

Closing out the week under $59.60 would be especially encouraging to bears as it would take out the underpinnings of oil's April-to-June up-leg. A sell-off below $58.66 would knock the legs out from under the broader rally that began in February.

After this morning's downside probes, near-term resistance rests at $59.60; selling pressure over the intermediate term ought to be expected between $62.25 and $62.33.

Comments

[Fighting Yoda:]

Yup, fundamentals and technicals are bearish for oil. You can't have prices held up simply by cutting production and holding back supplies from the market (in barges on sea). Green shoot and China hoarding speculation phase is over - prices are going down - likely below 50 by end of July.

Jul 10 04:48 PM

[TurtleTrader72:]

The recent decrease in the price of oil may have something to do with the recent strength in the US dollar. By overlaying the longer term charts of oil and the US dollar you will be able to visually recongnize the strong inverse correlation between the two. Generally speaking, as the dollar loses value the prices in oil and other commodities go up. With that being said, if you have a bearish view on the US dollar (which many people do) then this recent correction in oil could be a potential buying opportunity. Despite its recent resiliency, the US dollar has yet to reverse its intermediate term downtrend and will very likely continue this down trend over the coming weeks. This should support higher prices in commodities including oil over the intermediate term. However, I would wait for oil to prove this theory through some positive price action before committing any funds to the trade.

Jul 10 05:43 PM

[Ferdinand E...:]

A valuable article, especially for persons with a serious interest in learning something useful about the oil market..

Jul 11 10:36 AM

[The Greates...:]

Oil between $35-$40 by December, the oil industry pricing has been on life support through out this Feb-July rally. The pure facts are clear, people are not buy anything that they do not need. The recovery is a long way off, like all the jobs that have been lost since July 08. Like the old saying goes, “It is time to pay the piper.” The bailouts that went to the too big to fail did nothing for the US economy, throwing good money after bad money never works. The worlds economy is too global for any amount of bailout to work, it is simply too large of a problem. The over all global economy is going to have to go through a trimming down effect, “cutting the fat” so to speak. And that is why America is losing 450,000 jobs a month today, adding to the 10,000,000 lost over the last year. Everything (everyone’s economy and business’s too) that proceeded the July $147 a barrel peak price was based on using way too much credit to get by on. When the bubble burst, so did the global economy. A lot of money was made up to that point, but where did that money go today? All the run up in the cost of crude did was leave the world with higher prices for every single thing manufactured, shipped, barter or sold today.

Jul 11 11:27 AM

[G. L. Turner:]

The Saudis warned in January '08 - going back to the early 1900's, every Major Spike in Crude has resulted in a 'Global Recession'.

Obviously, the spike of last year, completely contrived - at least any pricing above $75 - was the most extreme spike we have seen, causing major dislocations of wealth from the consuming nations to the OPEC/crude producing countries. Therefore, should we not expect to see the worst recession, maybe depression to date?

The sad part, is that the favoratism and loopholes in regs, that were so obvious spring of 08, were not "CLOSED" up prior to this spring, thus allowing the same little band of Greed Meisters - namely Government Sachs and brothers, plus the US 3 Big OIL cousins, to jump into what was the beginnings of a recovery in early April, taking the creme right off the top, thus sending us backwards before we got some traction...

Yep, it will be a long, hard comeback, especially now. Oil, and that dirty little WS group will now have to ride out the lumps and bumps with the rest of us...

Jul 11 05:37 PM