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Crude Oil to Break New 52-week High
By Dian L. Chu, Economic Forecasts & Opinions
The RBOB gasoline contract finished the week very strong and was the main driver for crude oil`s stellar bounce off the Euro zone downgrade which sparked a selloff earlier in the week. Crude oil rose to a three-week high and gasoline surged as a report showed the U.S. economy grew 3.2% in the first quarter on strong consumer and business spending.
Crude oil for June delivery closed at $86.15 a barrel on the New York Mercantile Exchange (NYMEX), the highest settlement price since April 6. Futures climbed 2.9% in April for a third straight monthly gain. Gasoline for May delivery also climbed 1.7% to $2.3963 a gallon, the highest settlement since Sept. 30, 2008.
Crude was also helped by the Fed FOMC decision to keep the statement language and associated monetary policy highly accommodative. This encouraged investors to pile into crude with a renewed risk appetite.
Contango & High Inventory
The latest weekly inventory report was positive regarding gasoline demand, but the rest of the EIA report was pretty bearish. Crude inventories increased by 1.9 million barrels, or half a percent, to 357.8 million barrels, but is 3% below year-ago levels. (Chart 1)
U.S. gasoline consumption average over the past four weeks rose 3.1% year-over-year. Demand for the fuel was the highest since September. At the same time, U.S. refineries ran at 89% of total capacity on average, a jump of 3.1% from the prior week, while analysts expected capacity to drop to 85.72%.
Fundamentals will matter at some point, but that point will be reached only when we are swimming in stored inventory, and tanker storage becomes entirely cost prohibitive. However, we are still a long way off that point as the crude market is in Contango. And there are still plenty of tankers available to store oil that would otherwise be flooding the market.
High Open Interest Raises Overvalue Concern
Bloomberg reported that oil volume on last Friday on the NYMEX was 27% higher than the average of the past three months. Open interest was 1.41 million contracts, the highest since June 11, 2008.
Some analysts think the high level of open interest raises concerns about whether the market is overvalued relative to fundamentals and whether the upward price trend can continue.
Crude Now Has a High "P/E Ratio"
Indeed, crude is a very volatile commodity and a $2-swing is the norm these days. Factors affecting crude`s volatility are the Euro-USD currency cross, equities rise or fall, global economic news, and to some extent inventory levels, with the a rare case of geo-political news such as Iran injecting a short busting rip higher.
Nevertheless, crude is no longer strictly about the inventory levels, it has become an asset class in itself and trades more like a stock these days, rather than a commodity. That is, when people feel confident bout economic outlook, crude may have a high “P/E ratio” relative to the fundamentals; whereas a perception of uncertainty about the growth prospects globally will send its P/E ratio much lower.
Right now, investors feel positive about the global economy, so crude has a relatively high P/E compared to the market fundamentals including the inventory levels. But an event or series of events that create doubts, like overly aggressive financial regulation, trade-wars, currency and debt crisis, or a significant tightening by the Fed, could send crude oil much lower to a a significantly reduced P/E.
Technical Analysis
Crude oil now just sits below the 52-week high estabished on Apr. 6. With the renewed risk trade back on in crude, crude could test and break out of the $87.50 area this trading week, and establish a new closing high between $88 and $90 a barrel, depending upon if the Euro-zone actually reached agreement on a Greece bailout.
If it fails to blow past this newly established level, expect a pullback to the $85 level, which should provide some solid support. (Chart 2)
Make no mistake, Heating Oil and RBOB Gasoline have both broken out last week as well and will be going higher through the next couple of months, with the RBOB contract leading the way for the CL (crude) and HO (heating oil) contracts.
Bullish Through The Upward Bias
So overall, investors should remain bullish on crude oil for the next couple of months and take any significant sell-offs as entry points to establish long positions through the upward bias--the summer driving season.
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Oil is no longer a risk play. How to play it is another question. I say buy silver.
90$ for oil will once again bust the system. The BP error blue screen thingy with that rig (maybe you heard about it) is pushing it up, but oil was a bubble in 2008 and if they reflate it, it will just implode again and pull the rest down with it.
In the long term, there´s only one way for oil - UP.
With this situation in the Gulf, future exploration now over for years and instability still the rule in the Middle East, if oil doesn't reach $100 per bbl in May then there is something seriously wrong from a market manipulation side of the story.
Nothing else in this market is priced on value or fundamentals, why should crude oil be???
The only thing that matters with oil is which way the "Risk" Wildebeests will be running in reaction to the Greece Bailout and another Chinese monetary tightening.
Will it be "Risk On" this week??
Or "Risk Off"????
There be Crocks in them waters!
so oil could go up $20 a barrel in a day any day now?
...the Memorial Day kickoff to the summer driving season is coming soon. In 08, oil made a $10 bbl jump the Thursday before Memorial Day. Thus began the endless predictions of emerging market consumption outstripping supply and started the climb to $ 140.
It's just another arrow in the quiver to loot the middle class with what appears to be plausible reasoning based on non fundamentals.
Imagine floating in a raft down a river - and coming to a fork. There's a big warning sign ahead:
DANGER
to the left - endless IMF bailouts, tax increases, global governemnt keptocracy and hyper-inflation ahead.
to the right - asset collapse, sovereign default, government failure, and deflationary depression ahead.
*
there wasn't much time to make a decision ... understandably, TPTB chose "left" -
The potential economic devastation caused by the Gulf of Mexico oil spill may dampen oil demand, and not just along the country's southern coast but in countries all around the Gulf:
The Mobile, Alabama Press-Register has published an article by Ben Raines with an alarming prediction. If the leaking well in the Gulf of Mexico shrugs off all control - the crippled blowout preventer, the wellhead, and any remaining control valves or baffles impeding the flow of oil and gas through the well - the rate of spillage could go to a whole other level: as much as 2 million gallons (150,000 barrels) per day.
http://blog.skytruth.org/
Uh-Oh
According to BP documents filed with the US minerals service, the volume of oil for an uncontrolled blowout is 162,000 barrels per day (6,804,000 gallons).
http://www.dailykos.com/storyonly/2010/5/2/862614/-eKos-Earthship-Sunday...
If you really want to scare yourself witless, consider something that no one is even talking about yet: the Gulf hurricane season is almost here. Picture the scene a month from now, when the oil is still gushing from the destroyed well-head, and another Katrina arrives. Not only does the storm push an oily tidal surge far beyond the coastline, into mangroves, marshlands and other delicate areas, but the winds pick up oily water from the ocean surface and drop it as petro-rain far, far inland. Someone please convince me that this is impossible.
David Kotok of Cumberland Advisors is out with some very gloomy comments about the economic ramifications of the Deepwater Horizon oil spill, and what it will cost.
Read more: http://www.businessinsider.com/david-kotok-125-billion-is-just-the-start-of-the-oil-cleanup-costs-and-a-double-dip-is-now-way-more-likely-2010-5#ixzz0mn969A6NGood call. This is the wild card for the next few months. It will probably create more regional depressions.
Support will break like a twig when the markets implode. When Big Ben and company go the way of the Greeks $85 will look like a gift.
I agree. It's WAY overpriced right now. I wouldn't touch it with a ten foot pole. The price is being driven by hedge funds, not fundatmentals. And when they start to freak out, watch out below. (See: March '08).
If people can't afford houses, they're not going to be driving to Disneyworld this summer. Oil is at the top end already. Any higher, and it will be one of the "excuses" for the Double Dip.
Oil is in supply decline. The reason people are storing it is for when consumption exceeds production again.
There are potential supply disruptions as the production on the margin is in increasingly violent and volatile regions. Too much reliance on Nigeria, Mexico, W Africa in general...by necessity.
Me thinks the oil was priced mainly in Euros , but now due to contagion effect in Europe, the pricing is shifting from Euro to Gold. We may see very high numbers in the coming months.
Dangerous thinking from Asiablues. If you want a mo-mo stock, buy one. Commodities should be bt by speculators only when they believe they are undervalued, and ideally only then when the technicals look good. This is too go-go for my taste.
Strong global recovery, plenty of liquidity, stay long energy, crude, and especially alternative energy. CTAs and macro funds will drive crude prices to new highs, overshooting fundamentals.
What is CTA?...Commodities Trading Activity?,... or Chicago Transit Authority,... or California Teachers Association?, or ????.
What is CTA?...Commodities Trading Activity?,... or Chicago Transit Authority,... or California Teachers Association?, or ????.
Certified Trading Analyst (any day trader)
"With the renewed risk trade back on in crude, crude could test and break out of the $87.50 area this trading week, and establish a new closing high between $88 and $90 a barrel, depending upon if the Euro-zone actually reached agreement on a Greece bailout.
If it fails to blow past this newly established level, expect a pullback to the $85 level, which should provide some solid support".
So it will possibly go to 90, but if it doesn't it will probably drop back to 85.
Sounds like I should ignore oil.