In recent weeks, every time I pull into the gas station I'm paying higher and higher prices at the pump. We've officially ended the summer driving season and are in a "shoulder" month before we shift over to the winter heating months. Nonetheless, Nymex December crude oil futures have surged a whopping 25% this summer.
Ouch. Is this likely to continue?
Supply Should Be Ample In The Fall
While physical supplies have been marginally tight in recent weeks, the supply side is expected to ease up into the fall and winter months, which should help put a lid on rising crude oil prices. While OPEC supply could narrow in the fourth quarter 2012, non-OPEC supply is expected to climb from 58.66 million barrels per day in the third quarter to 59.42 m (bpd) in the fourth quarter, according to data estimates from Citi Futures.
Additionally, the U.S. market is well supplied in part due the sharp increase in domestic production, amid shale drilling and fracking technology. For example, inventory levels at the WTI Cushing, Oklahoma delivery point are 34% higher than year ago levels, according to Citi Futures data. The four-week average for U.S. oil production is up 12.4% versus year ago levels through August 17, said Citi.
But, of course, this is the crude oil market and there is a lot more at play than just supply/demand economics.
Don't Forget Iran
First off, there is Iran and Israel. Rising tensions in the Middle East have helped fuel the so-called "fear premium." The European Union's embargo against Iranian oil imports has shaved about two million barrels per day off the global markets. But, Saudi Arabia is stepping up production, Russian production is climbing and the U.S. output isn't too shabby either.
Unless there are missiles flying and the Strait of Hormuz shuts down (and then all bets are off and crude oil could rocket to $150), supplies are not expected to be constrained in the fall and winter months.
It's Fear And Greed, Baby
But, in case you missed Econ 101 fear and greed are what drive markets, after all. Not a factor to be taken lightly.
Next up, there's QE3. We've got central banks around the globe likely to open their floodgates of monetary accommodation sooner rather than later. There is the ECB this week; there is rampant speculation that China will ease monetary conditions in an effort to derail what could be a hard landing for its economic slowdown. And, of course, there is the Fed. Will they pull the trigger on a QE3 at their upcoming September meeting? A lot will depend on the results of this Friday's non-farm payrolls report. The September confab could well be the Fed's last window ahead of the November presidential election to initiate another round of monetary accommodation.
What Is Priced in?
Looking at a daily chart of crude oil futures, I think there's a lot of the QE3 juice already priced into the market. We've all heard the saying "buy the rumor, sell the fact," and the energy markets may have already priced in another expected spike to the punch bowl.
With higher levels of non-OPEC supplies expected to hit the global market in the fourth quarter and the overall slow levels of global petroleum demand, if the Fed stands pat at its September meeting, QE3 juice already priced into crude could be taken out with a continuing pullback in price mid-month.
Anatomy Of A Chart
Let's talk technicals. On the daily chart there were a couple of clues that the recent bull trend was losing steam. First, a bearish divergence in the 9-day relative strength index (RSI) was seen ahead of the August 23 price peak. That simply means while prices hit a higher high, the momentum tool did not confirm that, hence a bearish divergence.
Second, the bears etched a classic bearish reversal on the daily chart August 23 with a push to a new recent rally high, but then a settlement in negative territory with outside day action. The market remains under that bearish influence now.
While this is a little unconventional, I like to draw trendlines on my RSI charts. I have found that it works similarly to trendlines on price charts. Currently, the RSI has broken its rising uptrend and is falling lower from overbought levels, still a negative position.
The daily uptrend is still actually intact for crude oil and the recent modest pullback has just been the bulls letting off a little steam. We all get tired after a run now don't we and the bulls have run up 25% in the last two months.
Very short-term, December crude oil future see near term support at $94.63. If that floor cracks, a deeper near term correction could be in the works, with 38.2% Fibonacci retracement support seen at $91.40.
However, if the September FOMC meeting comes and goes without a QE3 announcement, even that Fibonacci support could be tested as some of the wind gets let out of the crude oil bull's sails.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.