Petroleum Recoils from Record Trade above $98

Petroleum Retests Lower Range after EIA Disappointment, concerns over Weakening US Economy, and Rebound in the Dollar, while Natural Gas Slumps after lower withdrawal and mixed Weather Outlook.

Technical Outlook: Since our last report before the Thanksgiving holiday week when we said looking ahead technical analysis revealed mixed signals with stochastic and momentum in oversold territory yet still predicting further downside movement, meanwhile the linear oscillator as well as the MACD and parabolic continued to display a wide negative divergence and so overall the market is still technically bearish, the market reacted in kind by declining from the existing contract support of the new spot January futures which had been supporting the market at $7.80 and has now fallen too new two month lows hitting $7.38 today at the intraday session low before rebounding back above $7.45 at the close. Looking ahead most indicators suggest the market will now rebound from grossly oversold territory as stochastics, momentum, as well as the linear oscillator and others signal a possible upward reversal from recent lows. We anticipate potential consolidation, should the market fallback to retest support for downside price action to be contained above $7.41 as a critical pivot point at which penetration below this level could lead to a possible further slide down to the same support level that the preceding December futures reached upon expiration at $7.20- $7.25, however reaching this level over the near term seems unlikely before bullish forces take the market considerably higher first and probably challenged upside resistance at $7.80 possibly over the next 3-5 sessions.

This week's EIA report revealed another winter reduction albeit by only a modest 12 bcfs that was comfortably lower than previous survey estimates by DowJones and Bloomberg that were running near 21 respectively. Storage now stands at 3528, which is 106 bcfs above last year’s record high and now 301 or 9.3% above the five-year average of 3227 bcfs. After the market experienced the lower than expected withdrawal from storage prices quickly subsided to session lows finally getting just below the $7.40 support level to $7.38 in the morning session before the selling dried up and gave way to short covering and range trading throughout the remainder of the day until the market finally settled just above $7.45 and a minor loss on the day yet the lowest close for the spot January futures in recent months. Looking ahead fundamentally as the coldest weather of the season now approaches next week albeit possibly only briefly, the market will likely follow through to the upside after today’s rebound from lows as technical buyers converge with early winter bulls as traders react to the first signs of winter demand as the market conveniently and yet temporarily ignores the record heavy storage. Also remaining as a backdrop of support, despite the recent correction from record highs, is the fact that petroleum, a competitive fuel still remains at historically the highest levels of any previous winter’s start in history as the spot price for crude remains above the $90 benchmark. The fact that December is at least beginning to provide some of the coldest weather thus far for the year is nothing new, however as the month progresses it is critical that below normal temperatures prevail in order to prevent the market from reacting and returning its focus to a traditionally more than adequate and currently record amount of supply. And so as usual Old Man Winter will have the final say is to price direction in the coming months. impacting a more eastward shift as the trough containing the colder Canadian air mass is expected to move eastward may be short-lived and only provide a couple of colder days in the major consuming Upper Midwest and Northeast. If the colder air that arrives to these regions is that brief it will hardly provide much support to natural gas values as they feel the weight of all-time record high storage, which if this transpires could easily yield a penetration of last week’s lows and beyond taking out $7.50 with a vacuum resulting in an immediate test of $7.25 and even lower perhaps!

Concerning crude oil, the market today closed slightly positive with a gain of a meager $.39 to settle at $91.01 per barrel after an extremely volatile roller coaster ride whereby prices covered a range of almost five dollars per barrel after briefly hitting and exceeding the $95 per barrel benchmark in electronic trading overnight in reaction to a pipeline explosion at the Enbridge US – Canadian pipeline facility that took place at approximately 3:45 p.m. Central Time on Wednesday at the site which lies 3 mi. southeast of Clearbrook, Minnesota which killed to workers. Initially three of the four operational lines were affected which potentially pose a threat to our largest single crude oil importer supplying approximately 1.5 million barrels per day of Canadian crude to the US during the past quarter. However, after two of the four lines were reopened early Thursday morning and then line #4 was restarted in the afternoon with word of line #3 a 420,000 barrel a day pipeline possibly returning to full output with in two to three days, the market quickly gave back almost all of its earlier gains in what looked to be a continuation of the deep correction that began earlier in the week whereby crude prices declined almost a full nine dollars per barrel since Monday when prices were challenging the key psychological $100 benchmark coming within $.71 of this after hitting $99.29 in electronic trade! Extreme volatility continues to be the theme is the market has recently flirted with both the 98-$100 range on the upside and then the other extreme below at the $90 benchmark on three different occasions for both ends of the spectrum and all within the last three weeks! This enhanced volatility will probably continue over the near-term as traders continue to wrestle with the same ongoing conditions of a weaker dollar, the ongoing evidence of the weakening US economy, the constant threat of overseas tension, and of course the perception of limited supply colliding with the contrast of growing overseas demand. Evidence of several of these conditions surfacing to traders consciousness materialized in the form of today’s announcement from Saudi officials that they arrested over 200 individuals believed to be terrorists that were plotting direct actions against oil facilities within the country. Contrasting this failed bullish threat to supplies was ongoing talk that OPEC will soon increase output at the next meeting on December 5 in Abu Dhubi which also contributed to the afternoon selling and weakness the latter part of this week. Oil Movements, a British oil tanker tracking firm, estimates that OPEC exports in the month ending December 15 will climb by 500,000 barrels over the previous month. Further bearish news came from the major threat to oil prices as US economic data continued to hemorrhage negative fallout from the subprime mortgage meltdown as now the labor market is beginning to reveal its exposure as the number of Americans receiving state jobless benefits rose 10 year-to-year highs in the latest reporting week. This stood in contrast with the revised GDP figure of 4.9% of growth announced by the Commerce Department up from the 3.9% reported earlier for the third quarter, and yet will no doubt quickly fade from memory as economists expect a dismal reduction down to 1% for the final quarter as the retail market is expected to experience the worst Christmas season in years. As the October figures for housing foreclosures increased by nearly double to an alarming 94% over the previous October it naturally portends a bleak outlook for the holiday shopping season as the consumer retreats in fear of spending as his net worth shrinks monthly as home values have declined nationally by 4.5% just in the past quarter and the largest decline reported since record-keeping began! The fact that the national average for a gallon of unleaded regular gasoline is currently suspended well above $3.0 is also providing a good ”kick the consumer when he’s down already”, scenario that is certainly not adding to the Christmas cheer and happy outlook for spending over the coming holidays. This pervading economic fog that is quickly descending over the general public as even the most optimistic of media hypers that were previously and routinely sugarcoating and shielding the truth of the severity of the situation from the public, are now routinely warning of the probability of a coming recession. It almost seems very similar to back in August also following a 10% decline in the stock market that now the expected slowing demand from the consumer will obviously spread to his appetite for energy consumption as well as crude prices have already given up almost $10 a barrel from recent highs just like they did back in August. But let us not forget that decline came from the $78 benchmark whereas this recent pullback has been from much higher just below the $100 benchmark, and yet the evidence of a coming recession in the world’s top oil consumer is much more obvious and concrete. This week’s EIA numbers were also disappointing as despite crude oils supply drop, inching lower by only 0.4 million barrels, it paled in comparison to the expected 0.8 to 1.5 million, and the larger than expected increase of 1.4 million barrels in gasoline supplies along with the fact that distillate fuel stocks dropped by a minimal 0.1 million barrels also added fuel to the selling pressure. The fact that refineries increased operating capacity to 89.4% just contributing to gasoline’s increase in production for the week averaging 9.0 million barrels per day along with distillate fuel production increasing as well also added to negative sentiment. It seems that all of these converging conditions began to overwhelm the lingering threats and fear premium that have managed to suspend prices above the $90 benchmark for the better part of the past five weeks as predominantly these conditions have grown stale and up to now failed to deliver on any serious interruption to ongoing supplies and the flow of oil. While the international tension in Iraq, with the previous threat of Turkey moving against the Kurds in the North, the ongoing tension with Iran over their nuclear campaign, and of course the occasional spark of violence reported from Nigeria still remaining as a pending threat to supply, none of these have materialized with any new serious impedance to oil deliveries. If the status quo persists much longer and then converges with a potential warmer than anticipated outlook for winter in the Northeast, then the benchmark price for crude oil could easily crack below the key support level established this month at the $90 benchmark and then easily move down to test $88 and then possibly the $85 benchmark in short order.

Earlier this week, medium range forecast models were advertising a 4-6 day period of below and much below normal temperatures would overspread the eastern two thirds of the country, particularly the north-central and northeastern U.S., next week. Yesterday the medium range models backed off that 4-6 day period of colder weather, hinting that it would only be a 2-3 day period of below and much below normal readings. The models this morning have come in colder, and now feature a 3-5 day period below normal temperatures as they are much colder over most of the eastern two-thirds of the country, particularly the north-central and northeastern U.S., on days 6 & 7. As a result of the latest model trends, the coldest temperatures and the most persistent cold weather next week are anticipated over the north-central and northeastern U.S. Though the cold may moderate at times, particularly in the 8-10 day period, highs generally in the 20s and 30s are anticipated over the north-central U.S. most of next week. Highs in the 30s and 40s are forecast in the northeastern U.S. Conditions are expected to be more variable in nature over the southeastern U.S., where all models depict a brief periods of near and above normal temperatures in the day 8-10 time period. Highs in the 50s, 60s, and even the low 70s are expected to overspread the southeastern U.S. on the warmest days late next week. Meanwhile in the West, above and much above normal temperatures are forecast over most of the western U.S. for the balance of both the next week and 6-10 day forecast periods. Highs generally in the 40s and 50s are forecast over the northwestern and interior western U.S. most of next week. Daytime highs in the 50s and 60s are expected to be the rule for California and the southwestern U.S., with highs as warm as the low 70s possible in the warmest locations of the Southwest next week.

Natural gas has recently retreated from its brief foray above the $8.0 benchmark earlier last week as record heavy storage and the disappointment of milder weather to start this winter season along with other forecasts of above normal temperatures extending deeper into mid-winter has contributed to the recent decline. This time of year old man winter and the degree of which the arctic intrusions from Canada penetrate into the key consuming regions of the Upper Midwest, Southern Plains of Texas, and of course the Northeast, ultimately determines price direction and volatility. Many unknowns remain this early at the inception of winter but one thing is known in that season is beginning with the highest level of supply on record. This post Thanksgiving week has resulted in the market declining to a multi-month while whereby the spot January futures has retreated to $7.38 at today’s session low and an oversold condition. Near-term we anticipate price action to rebound from this level upward to minor resistance at $7.65 with a likely follow through to $7.80 as the coldest temperatures of the year approach next week. Look for consolidation and support to come in at just below current values at $7.41 with a more critical test of support below this at $7.20 to $7.25 which currently is the bottom established by the December expiration earlier this week.

Concerning the petroleum complex, this week’s price activity, has confirmed the price fatigue that we mentioned in our last report’s conclusion the week before Thanksgiving as we clearly stated that without the assistance of a new headline in the form of some type of threat to a major producer or extremely cold weather arriving in the Northeastern US, that the $100 benchmark would likely not be reached in the short term. The subsequent price action since then has so far supported our outlook as values have subsided definitively from recent highs just above the $99 level attained on electronic access highs and then collapsed reaching today’s session lows intraday below $90.50. As mentioned earlier the negatives of the slowing US economy along with talk of increased output from OPEC, which is already beginning to materialize from the November 1 increase of 500,000 barrels, is beginning to converge with the overbought technical chart pattern in the market resulting in traders liquidating their positions. The next shoe to drop could very well be weather related as market bulls begin to focus on the approaching cold in the Northeast with the intentions of drawing attention to the shortfall in heating oil supplies in comparison to last year along with the well-publicized perception of limited refinery output capacity whenever demand increases substantially. Near-term look for support to be well defended initially between $89.40 and the $90 benchmark, the existing support on the range, with a breakdown of this support possibly bringing a rapid decline down to $87.50 and then possibly a deeper washout all the way down to the $85 benchmark before value buyers step in to support the market. On the upside of the equation should the weather take a sudden turn for sustained below normal temperatures, or if overseas tension ignites another bullish wildcard, or some other key supply line is interrupted such as with the Canadian facility of Enbridge, then look for a rapid retest of upside critical resistance at the $95 benchmark with a close above this key level positioning the market for another attempt to assault the recent highs. In the meantime traders will continue to keep the third Eye focused on the level of the stock indexes and the continued fallout of the subprime mortgage market as the spread of the infection throughout the financial arena becomes more manifest. This will become more evident as the world learns that through the contagion of derivative and mortgage debt related investments that were directly or indirectly linked to the industry, that the resulting problem is much more widespread than most experts thought, and reaches parameters that potentially could escalate to epidemic economic proportions, forcing even the most optimistic financial gurus to rethink their forecasts. The economic fallout and the resulting recession that many are forecasting for the coming year will no doubt take its toll on the level of demand for just about anything consumable including energy and many other commodities across-the-board, the magic question is when and to what degree will this overriding perception become manifest and finally impact prices. Only time will tell but one thing’s for sure, it will be followed by extreme volatility that some will anticipate yet many others will be surprised as often history reveals. It is my opinion that many of today’s economic conditions are a first and thus prevents many economists from getting a clear preview as to what will likely transpire next as direct correlations to similar conditions in the past hardly exist. This situation, in conjunction with relatively new household terms such as global warming are contributing to one of the most uncertain conditions in recent world history, and in my opinion is also why Gold recently came within $12 of its highest all-time price!

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United Strategic Investors Group