Petroleum Retreats from Record Trade above $96 after profit taking from Bullish EIA Report

Petroleum Retreats from Record Trade above $96 after profit taking from Bullish EIA Report, Overseas Tension, Weaker Dollar, and Speculative Fever, while Natural Gas Moves up despite Bearish Supply Update as First Sign of Winter Approaches .

Technical Outlook: Since our last report we said looking ahead after the key reversal from below the 3 week support at $6.70 the technical outlook is more constructively positive, however, signals were now mixed with shorter term indicators such as stochastics pointing higher while the Linear oscillator and MACD suggest weakness while still others such as Relative strength and momentum were more neutral. Based on this configuration we said we would rather rely on price objectives to govern the technical outlook to become more confirmed and reveal whether the bulls or bears have established more control. Looking ahead based on the rapid advance we saw last week heading into the end of the week we said while prices may fall back first, we felt a more meaningful headline fundamental will likely arrive to break the market out of the range, which would then affect a return to test the critical $7.42 resistance level and then eventually, judging from price behavior I expect prices to retest the recent high at $7.61 soon. Since the debut of the spot December futures, which had settled last week Thursday the day of our report, just above resistance at $7.80, the next key resistance level was at $8.20 which was clearly broken yesterday as the market has demonstrated a strong bullish breakout over the past two sessions. This has left most technical indicators in a bullish posture with the linear oscillator and the MACD with a strong positive divergence suggesting further upside ahead, while relative strength, momentum, and other technical signals also pointing upward. And of course along with such a strong run whereby the December futures has eclipsed a virtual vertical advance of over $1.20 in only eight sessions, the market has left some indicators such as stochastic entering overbought status which could attract profit-taking in the near-term. However, under the current momentum we anticipate a near-term challenge to $8.80 as minor resistance and also see a potential break out thrust through the $9.0 benchmark with a potential to challenge the next resistant span between $9.40 and $9.60 near term as historically whenever the market has eclipsed $8.60 basis spot during the winter the market has ultimately challenged the $10 benchmark over the majority of years! Should the market over the short term find rejection from below minor resistance from a lower high, sub $8.80, then look for rejection selling to return the market to test support, first back at $8.10 and then if broken a more critical test at $7.80 would follow with strong buying defenses expected. It is very possible in our opinion however that profit-taking may find strong buying at minor support just below us between $8.25 scaled up to $8.40 that may be enough to propel values back up to a challenge of new highs.

This week's EIA report revealed an injection into storage of a higher than expected 66 bcfs that was comfortably above both previous survey estimates by DowJones and Bloomberg that were running near 54 respectively. Storage now stands at 3509, which is 56bcfs above last year’s record high and now 272 or 8.4% above the five-year average of 3237 bcfs. After the market experienced the noticeably higher than the 5 year average as well as considerably more than expected injection into storage, the market staged the typical knee-jerk pullback in prices before returning to the rather dramatic uptrend that had been in progress over the past week yet was more pronounced in its obvious defiance of today’s negative trend in petroleum across-the-board as the market settled with a gain of almost $.30 to settle at $8.63 per million BTU and remained the only positive close in the Energy group on the day. This also was in stark contrast to the massive liquidation that was going on in the broader stock indexes as the Dow Jones was down in excess of 240 points during the afternoon session which typically would have also imposed a negative inference on energy prices as an indication of softer demand yet to come. However, as we mentioned in last week’s report, the arrival of the first winter like weather would most likely dominate trader’s thoughts and give them a bullish focal point to substantiate their renewed buying commitment. Today’s price behavior confirmed the last statement we made in the fundamental section of last week’s report whereby we clearly stated “if the first cold shot of winter like air arrives just after Halloween as predicted, prices may again defy logic as well as gravity and seek new highs next week to the dismay of many”, and of course this is exactly what transpired. Looking ahead, traders will now be earnestly reading into the weather forecast to determine to what degree temperatures fall below normal and more importantly for how long as the current upswing in prices will need to see some sustained below normal conditions in the major consuming regions of the Midwest and Northeast in order to justify elevated current pricing in the face of a new record high supply in storage for winter needs, in my opinion.

Concerning crude oil, the market today closed for a brief loss of $1.04 to settle at $93.49 per barrel yet again after an explosive continuation of the recent short-term uptrend as spot December futures reached a new all-time historic price level of $96.24 per barrel in late-night electronic trade on the aftermath of this week’s bullish EIA report which again showed a much larger than expected drawdown in crude stocks for the second consecutive week. The momentum upward created from surprisingly and somewhat suspect pre-estimates that were calling for a crude increase in stocks created enough bullish” data shock” as the EIA revealed a 3.9 million barrel reduction in crude inventories leaving ending stocks at the lowest level in two years. This single supply revelation provided enough bullish fodder for traders to ignore a modest increase to both products as gasoline stocks rose by 1.3 million barrels and yet remain below the lower end of supply for this time of year while distillate stocks also increased by a smaller margin of 800,000 and yet remain in the upper half of the average range of supply, and yet these product supply increases came on the back of another refinery capacity rate reduction operating at 86.2% and so clearly demand is softening for product consumption as the consumer continues to feel the squeeze of pressure from the collapse in the housing market. However, when you look at the stacked deck that still seems to be in favor of the current uptrend in petroleum values underpinned by a weaker dollar as the euro briefly surpassed 145 on Wednesday following the fed rate cut decision of a quarter point in both the fed funds rate and the discount rate. Then you add the ongoing international turmoil amongst major producers in Iran, Nigeria, and to a minor degree now in northern Iraq, and of course the limited production constraints here in the US as we enter peak winter demand, and one can certainly see the argument posed by the recent bullish price escalation and speculative fever for higher expected levels for petroleum near term. While we don’t currently subscribe to the opinion that fundamentally crude oil should be valued at $100 per barrel, and the level that has recently resurfaced from longer-term predictions that have been well-publicized and were first made famous last year when Goldman Sachs made the prediction of a super spike to over $105 per barrel and yet that was based on a sudden supply disruption. Yet we do not ignore the current technical momentum along with the buying power that has been created from speculative commodity and hedge funds along with overseas institutions that are fueled by fear and the recent increase to their purchase power from the demise of the US dollar which continues to diminish its ability to cover the cost of a barrel of oil. On this premise alone one can see the current momentum sustaining enough ability to at least, if only briefly, to challenge the $100 benchmark over the next two weeks and with enhanced volatility which has now become a common theme, while pullbacks will be sharp and yet quickly bought in our opinion, higher values and elevated average pricing that poses a severe challenge to global economic prosperity will become a sad result. Obviously the threat to US economic growth, clearly demonstrated by today’s stock market plunge reducing the Dow Jones industrial average by 362 points or 2.6% to close at 13,567.87, remains as a latent longer-term threat to energy demand and yet has not yet been perceived as such. However we continue to reiterate as we have stated before in past reports the negative effects of the worst housing crisis in our time will have to inevitably materialize as a strong deterrent to the consumer who carries the weight and responsibility of 70% of the nation’s ongoing growth. It is our contention and belief that over the next two quarters as this consumer credit breakdown becomes much more evident it will ultimately take its toll on purchasing power and thus demand for all resource commodities across the board including petroleum and mainly evidenced through slower gasoline consumption. It is the perception of economic slowdown that will cause the first noticeable negative wave in petroleum pricing that will likely be precluded by a strong stock market decline much like the large sell-offs in excess of 10% in both markets as recently as this past August. Until then we now have a little more clarity in the technical outlook for crude oil as resistance has been recently established above at the $96 benchmark with a decisive support also established today in the morning session and reconfirmed in the afternoon at the $92 benchmark, and in my opinion a break above resistance at $96 seems more likely to transpire before falling back below $92.

After a mild start to the week, at least a brief period of more winter-like temperatures is expected to overspread the eastern two-thirds of the country during the day 5-8 (next Tuesday through next Thursday) time period. In response, below and now much below normal temperatures are forecast over the most of the central and eastern U.S. for the balance of next week and 6-10 day forecast periods. Just how prolonged the cold weather becomes is where the medium range models display their most notable differences this morning. During the day 5-8 time period, European and American models both depict widespread highs in the 40s and low 50s overspreading the north-central and northeastern U.S. Highs as cold as the 50s and 60s are forecast as far south as the Gulf Coast States. During the day 8-10 time period, notable differences begin to develop between the medium range models regarding the longevity of the cold. American models, particularly the 00z operational model, feature a more zonal (west to east) jet stream over North America and suggest the warm and dry conditions over the western U.S. will build eastward into the central U.S. European and Canadian models, particularly the 00z European operational model, depict a strong meridional (north to south) jet stream and feature much stronger western ridge and deeper eastern troughing than the American models. In response, European and Canadian models are much colder over the eastern two-thirds of the country (and warm in the West) during the day 8-10 time period than their American counterparts. For instance the 00z American operational model suggests highs as warm as the low 60s will return to CVG as early as day 9 (next Saturday). The 00z European operational indicates highs will struggle to climb out of the low 40s in CVG the same day. The WSI forecast is primarily based on the 00z European ensemble model, which is not quite as cold as its operational model, but still much colder than the American models. Meanwhile in the West, warm and dry conditions are forecast over most of the western third of the nation for the balance of the next week and 6-10 day forecast period in response to the building western U.S. ridge. The warmest temperatures and the most persistent warmth are anticipated over the Southwest, where highs in the 70s and 80s are expected to be the rule for most of next week. Highs in 70s and 80s are forecast over interior California. Even the northwestern and interior western U.S. is expected to see seasonably warm temperatures, with widespread highs in the 50s and 60s forecast throughout these regions.

Natural gas has broken out of the recent range in a classic upward bullish wedge that has resulted in a close above key historic resistance at the $8.60 level. We see this key landmark being surpassed so early in the season as a bullish signal that typically indicates much higher prices to follow. One thing’s for sure that is commensurate with recent petroleum pricing and that is that natural gas price behavior will not be lacking in volatility this winter season. Looking ahead as colder temperatures are due to impact the Upper Midwest Northeast and actually the whole eastern half of the country going into next week and thus could propel prices much higher over the short term with traditional exaggerated price action possibly even causing a test of between $9.80 and $10 benchmark over the short term! However if the colder temperatures are short-lived or fail to sustain themselves or disappoint recent bullish sentiment, then look for the current challenge at minor resistance above at $8.80 to invite rejection selling that may return values back to test minor support at $8.25 scaled up to $8.40 with a failure of this price band leading to further liquidation down to a more critical support at $8.10 and then $7.80. This steeper drop back below the $8.0 benchmark could quickly transpire if weather disappoints as the supply level has reached a new record high entering winter and while this fact is obviously being ignored currently, it will quickly return to trader’s attention if weather shows any indication of moderating or failing to deliver on bullish expectations.

Concerning the petroleum complex, this week’s price activity, similar to last week continues to defy gravity and even traditional wisdom as prices recently came within $4.0 of the psychological $100 benchmark, and all without the assistance of a major disruption headline that typically was needed to propel prices to a historic new all-time high such as in past years when hurricane Katrina or the Israeli Hezbollah conflict last year posed a legitimate threat to major supplies. No instead the current price escalation which is already exceeded those past peaks by almost a full 22% has been on the back of a broader consortium of fundamental factors that has provided the perfect catalyst for fear based fund allocation and yet all the while being legitimately supported by the undertone of limited production capacity worldwide and questionable refining capacity here in the United States. The perception of vulnerability to a sudden supply disruption either caused by a natural disaster such as a storm impacting the Gulf, although this year we seem to have dodged a bullet, or from a man-made and most likely military conflict in the Middle East from Iraq or Iran or both, has reached such serious and legitimate fear raising proportions that it has successfully overcome the equally serious threat to demand from the world’s top consumer as the US faces the strongest threat of recession from the biggest decline in housing in the country’s recent history! What has further supported the recent runaway train in crude oil values is the continuous laboring production from our Gulf based refineries that suffered earlier this year an unprecedented series of mishaps that circumvented output to the point where gasoline supplies are seriously deficient and heating oil supplies have become somewhat questionable in adequately meeting this year’s quickly approaching winter needs. So while the revelation of the US housing based recession is gradually becoming more evident with every economic indicator that materializes, the evidence cannot be obviously produced quick enough to outpace the release of evidence of growing demand worldwide as China continues to experience double digit GDP growth, and worldwide threats to existing supply lines continue to thrive and pop up at unexpected time intervals such as the recent threat imposed in northern Iraq by the Turkish and Kurdish conflict. Eventually we see a collision coming whereby higher prices will have fully factored in the international tension threat to existing supplies that have yet to materialize and the current limitations in refining capacity in the US, and eventually the mounting evidence of a pending recession here in the United States will become overwhelming and is definitely being revealed in our opinion as bank stocks today saw their biggest decline since 2002 which triggered a contagion of selling that spread throughout the financial sector of stock indexes across the board today. Manufacturing grew in October at the slowest pace in seven months as the Institute for Supply Management factory index dropped to 50.9 trailing the 51.5 median estimate in a Bloomberg survey of economists, a reading of over 50 maintains expansion. Tomorrow’s unemployment numbers will no doubt shed further light on an ailing economy in the wake of the biggest housing meltdown amidst subprime mortgage failures that continue to send economic tremors throughout the credit markets sending economists and analysts scrambling to find an answer and try to determine when the proverbial bottom will finally be discovered! In the meantime and over the short term it seems the petroleum market is exercising selective focus and concentrating its trading efforts under the flag of future threat to supply and limited production versus the clear and present danger that is building of substantial threat to demand, and so under the current domination of fear based fund allocation we anticipate a near-term challenge to existing resistance above at $96 with a close above this likely to ignite a challenge to $97.50-$98.0 before profit-taking and another sharp pullback is expected as we do not anticipate the first challenge to the key psychological $100 benchmark to be successfully attained on the first attempt and will likely invite strong short interest and profit-taking on the first approach. So far prices have easily hit and exceeded our previous price target of $92.50 in last week’s report.

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United Strategic Investors Group