Support for Crude at $111?

Wednesday was an interesting day in the crude pits. First, the market opened substantially higher and crude moved straight up till the 9mm build of crude was announced by the DOE at 10:35am. Then it proceeded to have a $4 reversal over the course of the morning - then it rallied into the close. In between, there were many stories being thrown out there but one that I should have noticed had to do with the idea of support. Support, as most know, is a point where the buyers are stronger than the sellers and prevent sellers from taking the price lower. On the weekly chart of the crude contract, 111.50 is that level. As you can see from the chart, there is a double bottom there. Furthermore, this is occurring while crude is deeply oversold. Result: Perhaps a solid bounce higher...and not the plunge I was looking for.

At the same time, there are a few things working against crude. First, the aforementioned dollar versus gold model has turned into the favor of the dollar. Over the past 20 years, when this has occurred, crude has underperformed and in most cases, backed off toward the lows. Now that is not to say that crude moves down to the $30 barrel level. It does indicate though that the road higher will be difficult and paved with bearish stories. One of those bearish stories, could be the energy report from the morning.

I say "Could be" because this report had a little of everything in it. First, the headline build in crude was largely driven by imports though as one energy analyst I read indicated that the four week average of imports was somewhat inline with the figure today, making the "imports" excuse somewhat mum.

On the bullish side, the gasoline and heating oil inventory levels were reported stronger than expected for the bulls. Distillates are getting quite a demand push as overseas demand is driving down the levels of inventory we have on hand. Gasoline demand was actually lower again this week but in terms of year over year figures, sort of inline.

My rule of thumb with these inventory reports is to focus on the product that is the primary at the time of the report. In this case, it is gasoline though in a week or two, the focus on heating oil will be the story. Till then, the gasoline story is the one to run with on inventory day.

At the moment, the bulls might say that inventory levels have sunk over the past four weeks. That is true but if you delve into the details and review a few other anecdotal news stories, you would find that refiners are not building inventory - they are just not refining as much. I guess that happens when you practically lose money on each barrel of crude you refine! So essentially the crack spread is effecting the inventory levels. A more advantageous spread and the supply will start cranking!

Another interesting support for crude sits with the oil stocks. Now, I am not saying go out and buy yourself an XOM or CVX. I am saying that they are starting to show some relative strength and in the past this has served as an leading indicator for higher crude prices. These indexes I speak of though are not quite strong enough yet to buy. This could be just one oversold bounce being set up for another drubbing to the downside.

So here is the story going forward. Short term indicators are rolling over. My gold vs. dollar model favors the dollar at the moment which is again bearish for crude. At the same time, my short term model is oversold and thus selling down here might not be the best bet still the market unwinds some of the pressure.

The weekly model shows some support at 111.50 so as long as that level is held, this market should find some level of buying. The weekly bounce, if holds, would push for the $120 level. Longer term models still argue for lower prices. Add to this the breakdown in the USO through the 95 level and my previous forecast of lower levels is still in play. Thus, longer term I remain bearish on crude. Short term, I am looking for a bounce towards the $120 level. From there, we could resume the decline.

Disclosure: None

Comments

[Gigem77:]

Use ten year data for oil, not 20. We will never see the same market that existed 20 years ago. 10 years ago China was a net exporter of oil, now they are the #2 importer, consuming 8 million barrels per day. World spare capacity was nearly 10 million barrels per day. Now it's less than 2.

Short term the stocks aren't waiting for your signal. DVN hit a low in the mid 80's and is 103. EOG has already moved from 94 to 106.

Carpe Diem

2008 Aug 21 06:36 AM

[Gigem77:]

Use ten year data for oil, not 20. We will never see the same market that existed 20 years ago. 10 years ago China was a net exporter of oil, now they are the #2 importer, consuming 8 million barrels per day. World spare capacity was nearly 10 million barrels per day. Now it's less than 2.

Short term the stocks aren't waiting for your signal. DVN hit a low in the mid 80's and is 103. EOG has already moved from 94 to 106.

Carpe Diem

2008 Aug 21 06:36 AM

[Bruce Allen:]

Tim, Goldman Sachs is standing by their prediction of $149 crude at year end 2008, although I suspect they're feeling some pressure. Watch what happens to prices when China turns Beijing back on.

2008 Aug 21 08:19 AM

[sharksm:]

Having been an energy investor since the 1990's, I have found technical analysis almost useless. Oil is a demand story, and China's lowered demand are solely the result of Bejing slowing down it's industries and driving for the Olympics. China growth is still over 10% and while I don't expect $150 oil, I do expect oil to averaqe over $120 for late 2008 and 2009. My oil investments, including integrated, e&p and service companies made plenty of money on $65.00 oil, let alone $100 plus. Since this present correction, insider buying has increased which indicates to me that the guys who know the business best are still bullish. The biggest threat to the oil companies is Obama, who if elected will be a pawn for Harry Reid & Nancy Pelosi and try and tax the companies out of business. Check out E, the Spanish integrated oil company that yields over 6% and would be immune from American Tax policy. Also Petrobas would be a good choice if the American people are dumb enough to elect Obama. At 74, nothing would surprise me!

2008 Aug 21 08:48 AM

[kkin365:]

Acknowledging myself as a novice in technical charting, I fail to see the double bottom at 111.50.

2008 Aug 21 08:56 AM

[unimpressed...:]

While you are busily constructing your charts, reality is marching on. As noted by sharksm in the comments, charting is useless in energy markets. They move too, quickly, to be plotted in the real time framework in which they exist.

Incidentally, did you notice that oil went over $121, today? Speculators have played out their shorts strategy, taken more egregious profits, and are, now, driving up prices, again. Meanwhile the stupid Democrats in the Congress, led by the dimwit from San Francisco are taking their full 5 week vacations as if nothing is wrong, anywhere, in the world.

If the electorate re-elects these yo-yos in November, they get, exactly, what they deserve. The Repubs are not much better but, at least, they recognize that Drill Here, Drill Now is the only viable solution to the energy crisis.

2008 Aug 21 01:37 PM

[Dan S1:]

I agree that this energy rally is a retracement rally of the main trend which is still down. I use technical analysis without using any technical indicators and this is what it's telling me. I'm still expecting lower prices by end of year 2008.

2008 Aug 22 12:09 PM