Petroleum Eye’s $90 with Record Close over Turkish Military Ambitions against Kurd Rebels

Petroleum Eye’s $90 with Record Close over Turkish Military Ambitions against Kurd Rebels in Northern Iraq and a Weaker Dollar despite Bearish EIA Report, Extending Overbought Condition, while Natural Gas Retreats Technically as Storm Threat fades and Mild Temperatures Arrive.

Technical Outlook: Since our last report we said looking ahead technical signals suggest the market will likely rebound from support at $6.70 to revisit $7.10, and if penetrated on close would set the stage to re-challenge resistance at existing highs at $7.42 above. We said the technical parameters were fairly clear, with support and resistance levels preset at very exacting price points. This is exactly what transpired as values quickly advanced not only up to our resistance level at $7.42, but then hit the next key price barrier at $7.60-7.65, failing at the intraday high of $7.61 today, which then yielded strong rejection forces prompting a key reversal that culminated in a test of support at $7.25, the session low, before settling within the lower range at $7.37 for a net loss of 8.4 cents on the day. Looking ahead, technical signals are now more pronouncedly bearish with stochastics, momentum, relative strength, and most short term indicators suggesting significant weakness ahead, with a likely challenge to minor support at $7.10 highly probable over the near term. Only a short term rebounding close back above $7.46 would neutralize bear forces in our opinion.

This week's EIA report revealed an injection into storage of only 39 bcfs that was comfortably lower than previous survey estimates by DowJones and Bloomberg that were running near 51 respectively. Storage now stands at 3375, which is 59 bcfs less than the supply last year at this time and yet 213 or 6.7% above the five-year average of 3162 bcfs. After the market experienced the noticeably lower than the 5 year average as well as considerably less than expected injection into storage, the market staged the typical knee-jerk spike of about .15 cents to quickly challenge session highs at $7.61 before subsiding and then eventually washing out all positive gains on the day as sellers quickly dominated trade into the afternoon. This has not only left the market in a more negative technical configuration, but also indicates traders sentiment as a sign of general acknowledgement that Storm season is likely to continue without further threat to production and milder weather ahead only brings further promise of softer demand near term as winter fears are temporarily ignored. With this week’s milder temperatures in the central and Northeastern US due to influence a likely higher addition to storage to be announced next Thursday along with a weather forecast that indicates more of the same next week albeit for a 1-2 day colder snap due Wednesday to Thursday in the upper Midwest, the path of least resistance seems to be lower over the near term for prices. Natural gas also made a noticeable separation from its sympathy with Crude today as prices moved in opposite directions despite oil’s acceleration on the close and a short term bullish EIA update today on Natgas supply. This also portends follow through weakness into next week.

Concerning crude oil, the market today closed again on an impressive continuation of the recent short-term uptrend spot November escalated into the close with a better than $.50 exaggeration upward through the previous highs in $89 per barrel set yesterday to settle at $89.47 per barrel for a gain of over two dollars on the session! The recent price advance characterizes a relentless runaway train that in its bullish fervor has eclipsed a more than $10 per barrel upward exaggeration over the past eight sessions since this past October 9th when prices were trading just above $79 per barrel! When you consider most of this price movement has been based on a massive infusion of capital by commodity and hedge funds whose primary motivation has been fear of a potential supply disruption to the Ceyhan pipeline that delivers oil from northern Iraq to the Mediterranean, that has not, and possibly may not materialize, illustrates just how sensitive the market is to supply threats because of the delicate and yet very tight perceived supply demand balance. When you consider the clearly bearish EIA supply update yesterday that revealed a slowing demand for gasoline from a weakening consumer that is besieged by the worst housing crisis possibly in US history, and you begin to realize how exaggerated the current price escalation may be especially if it is based on an occurrence that may or may not take place. The EIA declared an across-the-board increase to petroleum supplies with crude oil receiving a slightly more than expected 1.8 million barrels leaving a total of 321.9 million and a supply which remains above the upper end of the average range while motor gasoline inventories increased by a larger than expected 2.8 million barrels yet remain at the lower end of the average range, while distillate fuel stocks surprisingly also increased by 1.0 million barrels and are at the upper limit of the average range for this time of year. However, what was even more telling was the dampening demand outlook as gasoline averaged 9.2 million barrels per day in consumption which is 0.5% below the same period last year as production last week simultaneously fell for gasoline as refineries continued to operate at a constrained 87.3% of capacity. Bulls pointed to further support for the upward escalation from the recent threatening posture that Turkey has taken against the Kurds in northern Iraq, as the next step was approved by a landslide vote from the country’s Parliament granting permission to conduct military incursions across the border in pursuit of Kurdish rebels in a logical defiance of the hypocritical request by the US Government not to invade Iraq. Another financial factor that contributed to today’s robust price escalation in petroleum was the fact that the euro reached another new all-time high breaking above $1.43 against the greenback artificially inflating crude oil which is valued in US dollars and theoretically increasing overseas appetites for resource commodity purchases across-the-board. This ongoing situation economically along with the recent increased tension between the Turks and the Kurds hardly justifies a sustained price for oil at the $90 per barrel benchmark, especially when one considers the threat to actual oil production of the latter has yet to materialize whereas the legitimate threat to demand domestically here in United States is actually beginning to unfold. Economists continue to warn that the housing crisis is getting worse thereby increasing the odds that recession begins infecting the consumer, which to some degree is beginning to reveal itself in the weekly energy consumption data.

Fall-like temperatures to overspread the eastern two thirds of the country next week Summary

Even though the medium range models continue to display notable technical differences as to just how much

cooling over the eastern two-thirds of the country actually occurs next week, the one thing that they do agree on is that more fall-like temperatures will become established over the central and eastern U.S. during the 6-10 day period. As result, daytime highs in the 50s and 60s are expected to become more common place over the northern tier of the central and eastern U.S. during latter half of the week. Daytime highs in the 60s and 70s are forecast to become the rule for Texas and the southeastern U.S. Meanwhile, a building western ridge is forecast to bring widespread late summer warmth to most of the western third of country next week. The most persistent warmth is anticipated over interior California, the interior western U.S., and the Southwest. Widespread highs in the 70s and 80s are expected to overspread interior California next week while highs in the 80s and low 90s are anticipated over the Southwest. The interior western U.S. is forecast to see highs in the 60s and 70s most of next week. Because of the transitional nature of the pattern, anomalies are expected to average close to seasonable levels over most of the country for the balance of the 6-10 day forecast period. The exception occurs over the interior western U.S. and along the Gulf Coast, where anomalies between 1-4 degrees above normal are forecast for the balance of the 6-10 day period.

Natural gas has fallen back into a more negative price pattern after retreating decisively from a key resistance point above at $7.61 per million BTU spiraling from a positive upward thrust of $.15 into a classic bearish key reversal hitting session lows at $7.25 for a full $.36 reversal before settling at $7.37 for a net loss of 8.4 cents. This has left the market in a bearish technical configuration that in conjunction with a milder weather forecast to impact the central Midwest and Northeast over the next two weeks and with likely the absence of any realistic Gulf storm threat, makes the fundamental outlook somewhat negative as well. Given this outlook we anticipate weaker values over the near term with follow-through selling likely to carry the market lower to test previous support levels at $7.10 and possibly breaking back below the $7.0 benchmark into next week. Only by the slim chance that natural gas returns to sympathy with crude oil, which in itself seems very vulnerable to a much-needed price correction, and by some chance manages to rebound back above the $7.46 level on close do we see recent bearish control neutralized. Today’s price separation from petroleum also seems to negate this scenario as a low probability in our opinion.

Concerning the petroleum complex, this week’s price activity continues to defy gravity as well as fundamental logic as it seems obvious that fear based trading has begun to strongly influence fund allocation. And we warn that the market is setting itself up for a strong and sharp price decline as the potential for an international agreement or even a temporary halt to the escalation in tension could easily materialize thwarting the potential if any future interruption to what is already a limited oil production output in northern Iraq. Whenever a market experiences a sharp price escalation to such extreme overbought levels such as this, with crude rising almost 13% over the past eight sessions, and mainly based on the fear of threatening a supply rate that even on a temporary outage would not amount to the equivalent of OPEC’s recent production hike of 500,000 barrels, and typically a violent reckoning occurs as reality returns values to a level that is more congruent with existing fundamentals. It is already anticipated that the recent price run-up in petroleum values will further influence OPEC to announce another production output increase of an equal or greater amount in their next statement. At this point the impetus to liquidate can come from several different sources; whether it be from a technical rebound in the US dollar, more anemic gasoline demand data revealed by the EIA, a diplomatic agreement reached between the Iraqi government and Turkey that delays or suspends military action, or just good old-fashioned profit-taking due to a combination of any of the aforementioned or in conjunction with the market just reaching a technical ceiling that traders are unwilling to surpass. Buyers beware as a market peak can be brutally brief in its tenure and the ensuing price collapse devastating and deep, especially if the fear that initially promulgated most of the advance never materializes! In our opinion if the Turkish government does not initiate or indicate the enactment of the military capability that has now been granted within the next week or so, crude oil prices will probably return to test minor support at the $85 benchmark and experience a price collapse of at least $3-$4 which could easily transpire in one session! It is my view that the current threat imposed by this situation in northern Iraq is already well priced in with reaching and sustaining the $90 benchmark a long-shot without a new headline beyond what is already known in order to justify the price levels already attained.

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United Strategic Investors Group