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Crude Oil: Next Major Resistance $87 a Barrel
By Dian L. Chu, Economic Forecasts & Opinions
Crude Oil hit a high of $84.09 on Thursday morning before investors sold into the rally in all commodities before the volatile jobs report on Friday morning. The shorts pushed Crude to a weekly low of $80.30 early Friday morning, which was a nice buying opportunity, as Crude Oil closed the electronic session on Friday at $82.84.
After the jobs report came in within expectations, there was substantial fund buying back in all the commodities across the board with the thought that the still weak job market mandates the Fed to start the QE2 Program in a serious manner.
So, Crude basically went from $76 a barrel to $84, as it was under-subscribed by fund managers at the $76 level before the product`s inventory levels started to show declines due to lower refinery utilization rates and a pickup in demand on the Distillate side.
The pending jobs report supplied the expected pullback, and now Oil is trading at just below the $83 level. It should test $85 before Wednesday of the upcoming trading week, as the rush back into commodities after the jobs report indicates that this inflation trade still has some major support and legs by investors. If Crude breaks $79 to the downside then obviously the risk trade is being taken off by investors. (see Crude technical chart)
We are entering the 4th quarter of the year, a very bullish quarter by historical standards, where fund managers start proactively managing their portfolios for hitting their yearly benchmarks. This usually implies that equities get a buying boost into the close of the year. Crude Oil trades as an asset class in part, so expect this to provide a bullish tailwind for the commodity.
The Euro appears to be gaining steam at the 1.39 level, and with QE2 starting in earnest could likely reach 1.45 by the end of the year as the inflation trade accelerates. This again would provide bullish support for Oil in the 4th quarter. (see euro chart)
Commodities trade as a group to a large extent, and with Gold leading the way, the bullish interest across the complex from the grains and agriculture space to the Soft commodities like Cotton, Coffee and Sugar, to the Metals group being buttressed by Copper and Palladium should serve as a conduit for increased capital being allocated to Crude Oil in the 4th quarter. I expect open interest to continue to climb in the Crude Oil futures contract in a steady fashion for the 4th quarter.
For Crude Oil the next major resistance level is roughly $87.50, sometime in the next month, assuming no major risk-off crisis occur, this level will be tested once again. It should hold for awhile, but eventually it should provide for a solid support level, once Crude Oil blows through the $89 a barrel level.
Some signs to look for would be: Do we have $4 a pound Copper? Is the Euro above 1.43? How is QE2 being perceived? Is it a major initiative or just a minor tweaking? If we should experience $25 an ounce Silver, forget about it, the wheels have officially come off the wagon, and Crude will be around $95 a barrel heading to the $105 range.
In the near-term, expect Crude to trade between roughly $81 a barrel on major pullbacks to around $85.86 on the high side for a couple of weeks in a consolidation phase, before embarking on a test of the next higher level around the $87.50 level.
This isn`t an exact science, more of a rough guideline for the expected trading ranges of the Crude Oil Futures contract for the next couple of weeks. An unexpected economic report or dramatic surprise in inventories can always surprise traders in one direction or the other, and thus poorly positioned traders often exaggerate moves to some degree. So expect lots of volatility but with a definable upward trend to the $87 a barrel level.
Dian L. Chu, Oct. 6, 2010
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Chart: CL
Inflation trade? Over.
http://99ercharts.blogspot.com/2010/10/crude_10.html
A good discussion! Great stuff.
I think crude has been pushed up by pair traders getting destroyed on the "long nat gas, short crude" trade.
Most junior nat gas producers have been pushed close to bankruptcy, we should see a reversal in that trend soon.
You could be right Mr Robo.
$5.50 - $6 by end November then reverse to $4.50
EFT or futures ...?
My guess is that explanation is way over most people, and I don't mind being first up to ask for a clarification if you don't mind some backfilling Robot.
Looking forward to the education........I hope.
The short hand around here is pretty hard to parse.
I don't do pair trades, but the hedge funds love 'em. Let's take one most people can relate to... Before 08, you might have gone long Ford/short Chrysler. Theory is you benefit from the strong company/weak company divergence without any net exposure to the auto industry. Nice idea, full of problems.
First, you're betting you know which company will do better, but you're also betting that the market doesn't, ie the difference isn't already priced in. Is that likely? Also you still have some industry exposure. If autos as a group do well, the weaker company may recover much faster than the stable one. See why I don't like this shit?
Back to the issue at hand. Bet you thought I had forgotten. In commodities, some pair trades make sense. Most PMs move together in historic ratios, as do grains, and the energy complex. When something gets out of whack, you sell the overpriced, buy the under.
Trouble is, as RT suggests above, this is very hot money. If the trade goes the wrong way, everyone rushes to the door at once. There are many other important factors, like how well one commodity actually substitutes for the other, what the Fed is up to, etc. Hope that helps.
Definitely helps. Thx.
Don't trade pairs either. Do trade Oil and NG.......as a general rule it pays to ask, especially here at resource rich ZH.
>>
How does a rising oil price tally with a slow-down in economic activity?
Is it me, or is there a major disconnect? (Not ruling out the combination...)
>>
Maybe you only looked at 1/2 the supply and demand question. You only looked at demand.
And you do not measure supply with the inventory report every Wednesday. You measure it from what is coming out of the ground all over the world. That's not a value that is spiking.
this is very interesting indeed. there are "alternatives" as well but they involve "burning food" for now. no Fed Chairman can survive long with soaring ag prices. it is the ultimate policy failure putting at risk millions if not more. that is why "it is only once in history the wheat market was cornered." it is about to happen again--and that will probably be just for starters. THAT is scary. Good for Chicago though. And transportation stocks, too.
The Dollar is oversold on just about any metric. It could and probably will easily manage a technical rebound towards 83. If you want to be long crude oil in that environment be my guest because I will gladly take the other side of that trade and your head while you are handing it to me.
but h the dollar is overpriced by a large factor. it looks oversold on the RSI but an uptwitch would correct that & reset the RSI a few points higher for a new down attack. 15 not unreasonable in these circumstances. you say 83 I say 73 by around end Nov. otoh anything can happen & probably will. Maybe BB will refuse to print another dollar until your gub behaves normally. ha,, a double first ...
interesting. how about "currency wars" however? in such an environment "what the dollar does" is no longer relevant. clearly "the world is too busy trying to take down number one" to care about how many of their own they starve--and that does include and involve us by the way. in no way either am i blaming the administration for this circumstance. this is why you have armies, navies air forces and marines. it "get's the nazi pigs in line" if you know what i mean.
Hmmm ...
This is a very dangerous situation with fuel prices at a level that constrains business profits and causes bankruptcies. An oil price driven crash can occur at this price level.
With the large credit overhang, any consequent deleveraging will escape containment action by the same central banks that are stimulating asset prices right now.
If prices reach a price that speculators jump into the market testing the 2008 price level is not out of the question. The higher the price the greater the follow- up decline.
The commodities are a classic bubble without the widespread public participation that sustained the 'dot com' and sub- prime bubbles. The Fed and other central banks are playing with fire and the consequence is the double dip the Fed's actions are intended to prevent.
dangerous? how? do not substitute your pain for the economy's. and "commodities are a classic bubble"? really? the prices for all commodities could rise another ten fold before they would have an actual impact on the inflation rate since overall they are such a small part of the economy and even many corporate earnings. remember: "listen to the treasury market." that tells me "commodities could have a massive amount of room to run while still allowing for growth."
anyone got a real rates chart from the 60s ... ?
one i have is a thumbnail, not very easy to read.
How does a rising oil price tally with a slow-down in economic activity?
Is it me, or is there a major disconnect? (Not ruling out the combination...)
A strong bull market in any commodity or any asset has nothing to do with underlying economic fundamentals but rather with liquidity entering that market. To the argueable extent that the powers that be, let us say the Saudis in conjunction with Western political and financial power have a strong hand in managing oil prices, I would guess they are happy with oil near $75 with DX in the low 80's.
08's blow off was a disaster nobody wants to see repreated and if oil producers are the main beneficiary of monetary inflation that becomes a problem politically and economically in the US. As long a global growth is low then there is little chance of spot cash market shortages of oil anywhere which could send speculators rushing into oil. With the supply demand balance stable I believe it is well within the power of the Saudis and the major oil companies to keep oil from spiking.
This is sheer guess but it makes perfect sense that for the powers that be avoiding a big bull market in oil is a top goal. They lost control and got too greedy in 08.
Absolutely not. Bernanke obviously feels that rising energy prices and food prices combined with 20% real unemployment and declining wage pressures is the ticket to recovery. Nothing like charging people with no money more for what they need to get the economy kickstarted.
Inflation cannot gain traction in the face of contracting credit. All Bernanke is going to do is crash the economy and make the Fed look foolish. More foolish than they already are.
Thanks to all of you above. I guess the obvious was too damn easy. I was looking for a market reason -- but I forget. There IS no market any more, just interventions.
we do not know what Chairman Bernanke is thinking. We do know what his "et als" are--and those that speak do seem to agree with your assessment. He is still a Chairman however--he can "do other things" as well.
+1. Exactly.
Same way it got to $145. Ben's funny money has to go somewhere. Nat gas at 3.64
There's some resistance for ya.
Could it be...http://www.youtube.com/watch?gl=US&hl=uk&v=KJh0pDMnL8M
Hey everyone,
Anytime you are having a conversation with someone and the conversation turns to money or finance, please ask them this question,
"Why does a private bank control the printing of the U.S. Dollar?"
That is all that I would request of you.
I junked ya. Your putting this same exact message, word-for-word, on every thread on the board.
The essence of JUNK.