Seeking Alpha

Herman Hemati's  Instablog

Traded equities, derivatives, forex, and has traded commodities through currency correlations, UNG, USO, etc. for approximately 7-8 years. Throughout those years, trading and investing has grown to become a passion of his life. Constant due diligence and hard work has expanded his knowledge and... More
My business:
The H Report
My blog:
The H report
  • Weakness Forming in Crude? Part III

    Can Demand Hold?

    In the previous articles of this series, I mentioned a bearish divergence forming in crude prices and a bullish divergence forming in the US Dollar.  These relationships, in conjunction with a fragile economy, have alluded to the reversal of crude prices. 

    Recent reports have indicated that crude oil demand could increase in the short term.  Even though these reports may signify that there may be an increase in demand, it does not necessarily denote that demand will increase.  Given the current market conditions, I believe that further appreciation of crude prices will directly impact the recovery of our global economy. 

    This morning at 10:30ET, the EIA will be publishing its weekly status report on crude inventories and production/import amounts.  This report will be pivotal in helping align current supply levels with our demand.  A recent Bloomberg news survey showed that OPEC may have decreased its oil output for last week. 

     http://bloomberg.com/apps/news?pid=20601072&sid=acn38DusOPL4

    Assuming that the survey is accurate and OPEC reduces their output, will the reduction in supply be enough to stabilize crude?

    Unless OPEC reduces their output by a significantly large amount, and US stockpiles decrease at an alarming rate, I do not believe it will be enough to help stabilize crude prices at these levels.  Regardless of OPEC’s reduction in output, I believe that supply levels will exceed demand and move crude prices lower. 

    In the chart below, the EIA has shown that the current US crude stockpiles are exceeding their average amounts.  This is another indication supporting the theory that supply could be exceeding demand.

     http://tonto.eia.doe.gov/oog/info/twip/twip_crude.html
    Given the current market conditions (no hurricanes, etc…); I believe crude prices could depreciate nearly 25% before stabilizing around $50-$55 by the end of 2009.

                                      Trade smart and prosper

    Disclosure: At time written, author owns multiple USO Puts.

    Tags: USO, ERX, ERY, DXO, DTO, Crude Oil
    Sep 02 12:24 am | Link | Comment!
  • Weakness Forming in Crude? Part II
    The Dollar Reversal
    In the first article of this 3 part series, I mentioned a bearish divergence forming within crude prices. The article depicted a chart displaying bearish divergence between crude prices, the MACD, and RSI. In support of my bearish stance and reversal prediction, I need to address two other major influences that impact crude prices.
    • US Dollar
    • Supply/ Demand
    We can almost always say that there is a strong correlation between the US Dollar and the price of crude. Commodities such as crude and gold are considered valid hedges against any dollar weakness. As the US dollar appreciates, commodities priced in USD rise and vis-versa.  Therefore, there is an inverse correlation between oil and the USD. 
    Recently the dollar has been under pressure, thus, helping drive crude prices higher. To support my bearish stance on crude, the dollar should show a sign approaching a short-midterm bottom. After analyzing the US Dollar Index, a bullish divergence has formed between the USD Index and the RSI.
    US Dollar Index
    In the chart above, I have identified trendline resistance and support levels which support the formation of a bullish divergence in the USD. If the divergence above proves to be valid, the US Dollar Index could trend as high as 82.5, sending the crude prices to $60-$65, and the USO could retrace to $34-$35 range by the end of the month.
    Disclosure: At time written, author did not own any securities of USO, but looking to accumulate option puts in the near future. Author is looking to buy the USD and sell the CAD.
    Tags: USO, UUP, DIG, DTO, DUG, ERY, ERX, Crude Oil, US Dollar Index
    Aug 23 10:56 pm | Link | Comment!
  • Weakness Forming in Crude?

    Recently the EIA stated that U.S crude stockpiles dropped 8.4 million barrels last week. This surprise in inventory levels prompted a series of buying, thus, sending prices as high as $72.50/BBL. Even with the bullish news of stockpiles decreasing, I believe that price of crude is at a short-term maximum. Any further price increase above $75/BBL for this commodity could greatly affect any recovery out of the recession.
    During the past month crude prices have risen approx. 15%. Any attempt of breaking above the key resistance level of $75 has been diminished by the bears. The $75 barrier has proven to be a worthy price barrier for the price of crude, and I do not foresee crude breaking higher anytime soon. 
    Technical Analysis:
    After analyzing the 3 month chart of United States Oil Fund (USO), I have noticed a bearish divergence forming within the MACD and RSI technical indicators.
    For those not familiar with technical indicators, the RSI compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. After analyzing the indicator in conjunction with the security, I noticed a discrepancy in the trends. 
    The MACD is <pic>calculated by subtracting the 26-day exponential moving average from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals. Source: Investopedia

    As USO makes new highs, the value of the RSI/MACD makes lower highs. This is an excellent example of bearish divergence. Bearish divergence occurs when the security prices jumps to a new high, but the oscillator makes a lower high. When an oscillator displays the following pattern described above it means that there is more selling pressure as the price increases.  3 Mth Chart - USO
    In the chart above I have identified trendline resistance and support levels. If the divergence above proves to be valid, (USO) could increase slightly before retracing to $34-$35 range by the end of next week.
    Disclosure: At time written, author did not own any securities of USO, but looking to accumulate option puts in the near future.
    Tags: USO, DIG, DUG, DTO, DXO, WTI, Crude Oil, Energy
    Aug 20 01:51 am | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

  • Bought to open INTC 20,21,22 Calls... selling 75% position End of Day
    Oct 13, 2009
  • Bought to open INTC 20,21,22 Calls... selling 75% position EOD
    Oct 13, 2009
  • Sold to Close YUM Oct. $35.00 Puts
    Oct 07, 2009
More »
Posts by Ticker
ABX, ATHR, AU, AUY, BRCM, COH, DIA, DIG, DTO, DUG, DXO, ERX, ERY, FCX, GDX, GFI, GLD, NEM, RTP, SMH, SPY, UHN, UNG, USO, UUP
Posts by Themes
Commodities, Crude Oil, Dow Jones, Energy, Gold, Heating Oil, Natural Gas, Precious Metals, Retail, S P, US Dollar Index, Wireless Communications, WTI
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.