A Classic Crude Bear Trap

Last week, the directional instability in the U.S. dollar index wreaked havoc on crude’s previous few weeks of steady upward momentum. Despite trading near its lowest levels since last December, the index (DXY) jumped almost 1% last Wednesday, which in turn helped the NYMEX crude contract plunge $3.88 or 5.8%. However, crude bounced back the next day as the dollar resumed its slide and Friday’s “less bad” GDP report lifted the September to finish its week in positive territory.

We thought that we were thrown a curve ball as crude seemed to have jumped back on the fundamental bandwagon that resulted in Tuesday/Wednesday’s combined $5.03 rout. A sizeable build in inventories was recorded, durable goods dropped 2.5%, and Big Oil’s quarterly earnings were in the toilet. Yet, when Thursday’s Initial Jobless Claims rose from 559k to 584k (bearish…right?), NYMEX crude oil skyrocketed $3.59.

Comments

[Larry House:]

I have a sure-fire indicator that the market (stocks and oil) will soon start correcting. My indicator--I took a long position today. I always buy at the wrong time!

Aug 04 04:10 PM

[whidbey:]

The dollars trip to 40 will be bloody as gold and oil rise and wreck the Obama plan for recovery with new high energy prices into the fall and winter.

The reasons are worth recalling: damned foolish in appointing economic staff, and the worse error of following the advice of the ninnies.

Now the new debt required will destroy the dollar, force taxes up, and reprice energy up to finish off the job market and distribution.

It is a nightmare and it is all ours.

Aug 04 05:54 PM

[RiskReturnO...:]

Long XLE, short XLY (Consumer Discretionary) if crude stays above $70 ... to benefit from convergence of the two sectors ... discretionary had big run up this year, while energy has lagged ... with higher oil prices, the prices have to converge at some point ...

Aug 04 08:01 PM

[No Leaf Clover:]

Interesting how the media blames the speculators when oil goes to $70 a couple weeks ago and the price moves down. Now oil is back to the same level, but that talk went out the window with the run up in stock prices. Not sure where the trade is from here, but guessing to see a slight pullback if inventories increase more than expected tomorrow.

Aug 04 09:41 PM

[Moon Kil Woong:]

If oil drops the government will press to keep speculators out. If it rises you will hear a litany of allow the free market to operate. There were no bills to pull speculators out of the market when oil was at $140 only when it dropped below $60. So which direction do the bill writers want oil to go?

I agree we should require more disclosure on all derivatives, but limiting market competition on price and destroying price discovery doesn't seem to be a good thing for consumers or the market if your real goal is properly valuing commodities.

Aug 05 02:38 AM

[David White:]

Oil was up initially on Tuesday (8/4/09) on the API report showing a crude stocks decrease of -1.5M, distillates -1.0M, and gasoline +2.1M. Overall the decrease was just -0.4M. This might have been enough to keep prices higher on the day. However, the report also mentioned, when you looked deeper, that imports had dropped significantly. This means the demand for oil is still low. The fact that bond prices firmed at the end of the day may have had an impact also.

The demand situation allows room for oil prices to move downward. The government reports stocks 8/5/09. If that report agrees, oil may be headed downward. The USD does seem to be trending downward. This may work counter to the thesis of oil going down in the near term. If the bottom falls out of the market soon, that will work in favor of oild going down.

Aug 05 04:33 AM

[David White:]

I should have also mentioned that the US equities markets are highly over bought. If that's not bad enough, China markets have risen about 100% in the last year. Experts think the Chinese markets are due for a 25% retracement. This may have already started. The same experts think the Chinese markets will take the US equities markets down with them. The Hang Seng is currently down -300 for Wednesday.

Aug 05 04:45 AM