Crude Market Rallies On Suportive Fundamentals

I questioned last week if crude wanted to rally on the supportive fundamentals. Yesterday, we got an answer, as the market bounced to the upside, continuing the upward momentum from last week.

The rally also supported the bounce in the Energy Select SPDR (XLE) which perhaps has been the rock support for crude all along (and a pain in my neck since I am short National Oilwell Varco (NOV) and Apache Corp (APA) ). The DOE reported draws in all three headliners and in delving into the details of the report more closely, draws in jet and residual fuel were also reported creating a situation where the whole complex is now bullish from a fundamental perspective (from my models).

The results of the report, which create a bullish bias in the fundamentals, joins a bullish trend in my rig count indicator and stabilizing demand conditions. The rig count trend indicator is still supportive though showing some small cracks (year over year numbers came close to reversing). The demand indicator currently is showing increased demand but if you look at the number from a year ago, it is lower. At the same time, it is even with the 2004 numbers – if you remember these demand numbers were followed by a very explosive rally to the upside.

In looking at the trade itself, the long term chart is showing decreased selling pressure though nothing yet to say that the bulls are in control. On the shorter term chart, a very bullish doji reversal will be registered at the end of this week if the crude level is maintained over the 58.81 level. Since this occurred from oversold, a more meaningful rally could follow over the next few weeks (and would in turn switch me from trading on the short side to trading on the long side).

Weather appears to be another variable that traders perhaps are considering. Colder weather year over year means more energy consumption year over year. With the plunge in unleaded prices, perhaps the income from lower energy, besides heading into the registers at Best Buy (BBY) and Walmart (WMT), ends up in the heating oil tank as people feel that they can turn the heat up a degree (when that was not really possible a year ago). Combined colder weather and increased demand perhaps puts support of sorts under the market.

Bottom Line: So here is the situation. The fundamentals are supportive of the rally. The technicals are starting to turn to the bullish side (though have not YET) and the weather is supportive. While the market still has a good deal of bearishness in it (just look at puts $4 out of the money), it probably has more room to run.

How much though? Well, immediate levels in front of the crude barrel are $63/$64 though given the amount of trade that occurred between the current $61 and there, it will be a tough hill to climb with plenty of resistance. Also, since my models still show a downtrade in play, I am working a sell stop under the market.

XLE 1-yr chart: