Oil Prices: Fundamentals Don't Apply

| About: The United (USO)
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Wednesday morning the Department of Energy released its weekly crude inventory report. In looking at the numbers, I would term this report normally as bearish given the move up in the unleaded inventory level (and switching the unleaded market to the short side of the equation). But two things are working against such a thought.

First, Hurricane Chris is entering the picture and has everyone in a buying mood. Also, the distillate inventory trend continues to be bullish. This could encourage buying in this area for the fall, especially if the market thinks that hurricane season will be difficult for heating oil production.

But applying fundamentals to the current market is a foolish endeavour. All one has to do is look at the natural gas market. Down $1 from the highs Tuesday intraday and then back up almost $1 yesterday. The market volatility pushes me into the technical analysis camp and disregards the underlying fundamental picture. It is markets like this that people, using the fundamentals, lose their shirt. Based on my technicals at the moment, the long term uptrend remains (I have been bullish for a bit now) in crude and the short term trade is higher crude (and natural gas). When will the focus shift back to fundamentals?

I do not think such occurs till we get out of hurricane season. We are dealing with “what if trade” even as the forecasts for lower temperatures are directly in front of us. A hot summer last year lead to a hot winter and a substantial rise in relative inventory level for both natural gas and crude inventories. What if the same is perceived to happen again? Ultimately people will be forced to sell crude because there will just be too much supply. But such thoughts will not develop till we get past the “what if” trade and with that, the technical’s will continue to rule trade.

Bottom-line: The short term may actually see out-performance by heating oil vs. unleaded gasoline. Crude looks supported from a fundamental point over the short term and the charts support higher crude prices. I am long both crude and natural gas.