17 Reasons for Crude to Fall Near Term

1. Crude is at a near term high for the year. It closed Friday at $73.89. This is at a major resistance point for crude. The charts below illustrate this point. The monthly chart shows the longer term major resistance from 2006 at approx. $75/barrel.

The daily chart shows the near term resistance at approx. $74 and $75. It shows near term support at approx. $61 and $55. There are also some weaker support points in the $65 to $69 range.

Technically crude looks like it is topping out. It appears that it is more likely to move downward from here in the near term. Of course, it could also break through overhead resistance.

2. The Unemployment figures were higher than expected last Thursday. Initial Claims were 576K vs. an expected 550K. Fewer people working usually means less gas being used to get them there and back.
3. The core PPI showed a decrease of -.1% last week. If prices are deflating, oil will tend to go down. The PPI showed a decrease of -.9% for the week (including food and energy).
4. The leading indicators came in lower than expected last week at +0.6% vs. and expected +0.7% (and last month's +0.8%). If the economy is likely to do worse than expected, oil prices are more likely to go down than up.
5. Redbook reported US chain store Retail Sales were down -0.7% for the first 2 weeks of August vs. July. Sales were down -4.4% YOY. This was worse than the expected -4.3%. This a continuation of a downward trend. If people are not shopping as much, they are not using as much gas. If they are conserving money on clothes, they are likely conserving money on gasoline.
6. USO technical indicators show that it is over bought. They also show what appears to be a weak downtrend in Money Flow into USO. The chart is below:

7. The Commodity Futures Trading Commission (CFTC) is considering rule amendments to curb futures speculation in crude, especially such vehicles as USO. Such actions could likely push crude prices downward, as it might necessitate a large sell off in speculative positions. If this happened, it might be propitious to own be short or to own put options on USO.
8. The price ratio of Oil to Natural Gas hit a record of 24.5 on Friday’s close. To a great extent this may mean that natural gas prices are going to rise near term (natural gas may be another play). However, it also likely means that oil prices are likely to fall near term to bring this ratio closer to its norm, which is 6 to 12. A barrel of oil has roughly 6 times the energy content of an MMBtu of natural gas. In strictly technical energy terms it should trade for about 6 times natural gas prices.
9. Oil use is down in the U.S. in 2009 vs. 2008. The total petroleum products supplied in Jan-July 2009 were 18,640,000 barrels/day vs. 19,850,000 barrels/day in 2008 (EIA). Oil use is also down worldwide in 2009 vs. 2008.
10. The total U.S. petroleum stocks were 1,844.6M barrels in July 2009 vs. 1,836.1M barrels in June 2009 (EIA).
11. The summer driving season is almost over.
12. Hurricane activity has been light this year.
13. A stock market retracement is likely coming. The markets are over bought. The caveat here is that they have recently broken through a major resistance point. This could push them higher in the very near term. That might push oil higher. However, much of the economic news was negative at the end of last week. That might lead one to think the breakout from the resistance point may fail.
14. Prechter is predicting a USD rebound upwards. He says that the only 3% bullish sentiment on the USD indicates a clear bottom. A US recovery from the recession might also tend to make the USD recover. If the USD moves upward, it will likely mean oil prices will move downward.
15. The Flu Season is almost upon us. The UK had 110,000 new cases of Swine Flu in the last week of July. The UK Health Minister predicted about a month ago that the UK could see as many as 100,000 new cases per day by the end of August. That prediction is looking more plausible each day. The W.H.O. has predicted there may be as many as 2 billion cases of Swine Flu worldwide this fall. This is likely to have a serious economic impact. If it sends the equities markets downward, it will send oil prices downward. Sick people usually drive less. That too should to push oil prices downward.
16. The earnings season in equities is essentially over as of the end of last week. The S&P500 earnings results have provided an impetus for the equities markets to move higher. Without this impetus, they may move lower. Recent volume to the upside has been relatively light. This may signal an imminent turn around.
17. The "Cash for Clunkers" program ends Monday. This has provided a big stimulus to the auto industry, etc. Its termination will likely be negative for the equities markets.

I think it makes sense to short USO at this point. I would put a fairly tight stop in. The equities markets could shoot up another 5%-10% after the breakout from their major resistance point. If they do, they will likely take oil up with them. However, if they fail the breakout, which seems more reasonable to me, they will likely take oil down with them. A tight stop will allow you to miss a quick up move. Then you could re-enter the trade to the downside at a more appropriate time.

Disclosure: I currently am short USO.

Comments

[BullnBear:]

I like your reasoning and personally I have been a big believer in reason #14 according to your list. If we see strength in the U.S. dollar I fully expect oil to pullback.

Aug 23 11:12 PM

[TinyTim:]

Yup-
"A US recovery from the recession might also tend to make the USD recover. If the USD moves upward, it will likely mean oil prices will move downward."

Since oil is basically priced in dollars, this should be the case.

The only caveat is the increased demand caused by a US recovery. The risk from a non-robust recovery is slight, but the US is the world's oil glutton.

Aug 24 03:08 AM

[Michael Clark:]

If the US economy recovers, the US Dollar goes up and the commodity anti-dollar play no longer makes sense. Traders sell commodities.

If the global economy does not recover, the U.S. Dollar doesn't recover, but demand for commodities (oil included) falls, and the deflation picture gets worse for commodities. Speculators thinking they are gaining by be 'out of' the U.S. Dollar lose on commodities as commodity prices fall. Panic selling in commodities take out whatever demand they had as an anti-U.S. Dollar safe haven.

Aug 24 07:34 AM

[Michael Clark:]

Actually, if I can comment to my own post, a global recovery would be good for commodities -- but a global stanation means that any strength in commodities trading is JUST financial speculation (and an anti-dollar play).


On Aug 24 07:34 AM Michael Clark wrote:

> If the US economy recovers, the US Dollar goes up and the commodity
> anti-dollar play no longer makes sense. Traders sell commodities.
>
>
> If the global economy does not recover, the U.S. Dollar doesn't recover,
> but demand for commodities (oil included) falls, and the deflation
> picture gets worse for commodities. Speculators thinking they are
> gaining by be 'out of' the U.S. Dollar lose on commodities as commodity
> prices fall. Panic selling in commodities take out whatever demand
> they had as an anti-U.S. Dollar safe haven.

Aug 24 07:36 AM

[David White:]

One good thing about a USO short is that it is biased in you favor. USO should lose money as it rolls its futures contracts to future time periods. Also there is the time decay factor. These factors work against you if you are long, but they work for you if you are short.

Aug 24 10:09 AM

[ETFdesk.com:]

Nice analysis, let's see if your prediction comes true.... track this call over time. tinyurl.com/m5tr9n

Aug 24 11:53 AM

[Mr. Big:]

" A US recovery from the recession might also tend to make the USD recover. If the USD moves upward, it will likely mean oil prices will move downward. "


Not if the recovery is fueled by stimulus (which it is).... Without the massive monetary and fiscal stimulus, there would likely not be a recovery. In essence, stimulus takes future demand away and brings it forward to the present. Since the currency is technically priced on a mark-to-market basis (i.e. it takes into account future expected supply and demand), we may be experiencing a "recovery" with a depreciating greenback.

Only when a recovery is based on real economic fundamentals (not stimulus), will the currency strengthen in conjunction with growth.

Aug 24 12:05 PM

[Shaggieman:]

When do the capital gains taxes revert back? I thought it was the end of next year 2010. If that's the case it might inspire folks to sell issues in the 2009 year at the lower cap rate. Do know but that's my understanding.

Aug 24 12:49 PM

[David White:]

Mr. Big: I perhaps was not explicit enough in what I said. I would tend to agree with you that inflationary measures by the Fed tend to lead to the USD to depreciate against other currencies. However, what I did not say, but what is happening is that the Fed, with the expectation of recovery soon, is starting to look at which stimulus measures it wants to cut first. Perhaps the first one that it is thinking of cutting is the program (a $300B one) to buy Treasuries. This is/was viewed as monetizing debt. It therefore causes the USD to deprecitate vs. other currencies. The Fed has said they will end this program in Oct. They have also said they will decrease the amounts of the purchases as they move to the end of the program (i.e. ease off the gas slowly). The announcement by the Fed that they are ending this program might tend to lead to appreciation of the USD. The Fed is evaluating all of its various programs. Most of these are inflationary (cause the USD to depreciate vs. other currencies). I am not sure of the Fed's exact intent on each one. However, it will be slowly phasing them out as it thinks the economy is recovering. This should allow the USD to recover a bit to. I also happen to buy Prechter's argument about the only 3% bullish sentiment being a good indicator of a market bottom in the USD.

Aug 24 09:13 PM

[David White:]

(MarketWatch) -- "Guess what? The Federal Reserve has not only stopped depositing copious amounts of liquidity into the economy -- it now appears to be in the process of making a sizable withdrawal.

For example, the monetary base -- the raw material for the money supply -- has fallen at a seasonally adjusted annual rate of 8% from early April of this year through mid-August, after soaring at a 187% pace during the previous eight months.

And after ballooning from $100 billion to nearly $1 trillion between September 2008 and mid-May, adjusted reserves have since declined at a 43% clip, to just over $800 billion.

As a result, the Fed's two measures of the money supply, M2 and MZM, have begun to contract. M2 has shrunk at a 3% pace since the middle of June, while MZM, the St. Louis Fed's measure of liquid money, is down by 2% over the same period. "

The above is another piece of evidence which points to a likely USD rise and an oil fall.

Aug 25 01:32 AM

[David White:]

Apparently the news that up to 200 additional banks may fail has at least momentarily killed the upward momentum of the equities markets. If the equities markets move downward from here, oil should retrace too.

Aug 25 02:00 AM

[Mayascribe:]

David: I suggest that you join in Freya's Instablog about the H1N1 virus. It's a combo about the development of the virus and, morbidly, investing ideas.

Come on board to this thread.

Aug 25 02:10 AM

[David White:]

Aug. 25, American Petroleum Institute Petroleum Stocks info for last week show:
"1. an unexpected 4.3 million-barrel build in U.S. crude stocks last week, confounding analysts' expectations for a 1.1-million-barrel fall, and coming after the 8.4-million-barrel drop the week before.

2. Gasoline stocks fell 1.8 million barrels, more than the 1-million-barrel drop predicted in the Reuters poll.

3. Distillates declined 146,000 barrels, versus forecasts for a 300,000-barrel rise."

All told this amounts to approx. a 2.4M barrel build. It is also a rise of over 4.1M barrels above expectations. This seems very likely to make oil go down tomorrow, if EIA roughly confirms these numbers.

Aug 26 01:10 AM

[David White:]

Mayascribe: I am interested. However, I am not sure how to come on board to a SA thread. If you could give more explicit instructions it would help. I clicked the "Link" field already.


On Aug 25 02:10 AM Mayascribe wrote:

> David: I suggest that you join in Freya's Instablog about the H1N1
> virus. It's a combo about the development of the virus and, morbidly,
> investing ideas.
>
> Come on board to this thread.

Aug 26 01:16 AM

[David White:]

It is unclear what the CFTC has in store for USO. However, it may end up restricting the number of shares the fund can sell. If the CFTC does this, this may cause the price of the USO shares to rise significantly above the NAV (at least temporarily). It might be best to short crude directly through the futures market. There is probably at least one less element of risk involved. I am unsue at this time when or if the CFTC will take any action against USO.

Aug 26 11:34 PM

[Blair:]

What a waffle!

"Technically crude looks like it is topping out. It appears that it is more likely to move downward from here in the near term. Of course, it could also break through overhead resistance."

So, if crude goes up , say $50, then White can say, 'I told you there is a possibility that crude 'could go up.'

Aug 31 02:10 AM