Technical Analysis
Nymex Crude Oil (CL)
Crude oil's rally extended further to as high as 82.0 last week and met mentioned target of 100% projection of 58.32 to 75 from 65.05 at 81.72. With 4 hours MACD staying below signal line, an intraday top should be in place and some sideway should be seen. Nevertheless, as long as 77.61 minor support holds, consolidation should be relatively brief and a break of 82, will bring rally resumption towards 50% retracement of 147.27 to 33.2 at 90.24. However, note that a break of 77.61 will indicate that a short term top is at least formed and deeper decline should then be seen to 75 resistance turned support first.
In the bigger picture, medium term rebound from 33.2, which is treated as a correction to whole decline from 147.27, might still be in progress. But after all, we expect such rebound to conclude inside resistance zone of 76.77/90.24 (38.2% and 50% retracement of 147.27 to 33.2). Hence, focus will remain on loss of momentum and reversal signal even in case of another rise. A break of trend line support (now at 69.14) will be the first signal of topping and further break of 65.05 will confirm and turn outlook bearish.
In the long term picture, there is no change in the view that fall from 147.27 is part of the correction to the five wave sequence from 98 low of 10.65. While there rebound from 33.2 is strong and might continue, there is no solid evidence that suggest fall 147.27 is completed and we're still preferring the case that rebound from 33.2 is merely a corrective rise only. Having said that strong resistance should be seen between 76.77/90.24 fibo resistance zone and bring reversal for another low below 33.2 before completing the whole correction from 147.27.
Nymex Crude Oil Continuous Contract 4 Hours Chart
Crude Oil Weekly report ( 26 October – 1 November)
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Nymex Crude Oil Continuous Contract Daily Chart
Nymex Crude Oil Continuous Contract Weekly Chart
Nymex Crude Oil Continuous Contract Monthly Chart
Fundamental Analysis
Although crude oil price slid -0.8% to close at 80.5, the December contract managed to gain +1.9% for the week. Market sentiment and risk appetite continued to improve despite mixed performance in economic data while the dollar's broad-based weakness remained one of the major drivers. Others in the energy complex also rallied last week with heating oil gaining +2% and gasoline surging +3.2%.
After decisively broken above the 65-75 trading range, crude oil price's rally accelerated and had been trading above 80 most of the time late last week, after released of the weekly US inventory report. The report showed mixed outlook to energy fundamentals. What investors focused on was the huge decline in gasoline inventory (-2.21 mmb). While they were thrilled by the second consecutive weekly of draw, the reduction was driven by low refinery utilization and soft imports, rather than increase in demand. In fact, gasoline consumption fell to 8.95M bpd during the week, down -3.3% and -1.3% from the previous week and a year ago. For distillate, although inventory dropped -0.784 mmb, its consumption also slid to 3.487M bpd, down -2% from a week ago and -12% the same period last year. While it's more understandable for gasoline demand to drop after the peak driving season, sluggishness in distillate consumption remains an overhang for recovery in energy demand.
It does not mean that we deny the improvement in energy market. In fact, inventory has hit the peak in 1Q09 while demand has also found the trough. In short, the worst is now in the rear mirror. The chart below shows the 1M-2M and 1M-12M WTI time spreads. We see that the time spreads have been smaller, suggesting underlying fundamental has improved. What remains to be our concern is that the pace of recovery is not justified for the pace of price rally.
A trading range between 60 and 80 would be more desirable for oil price with the current economic backdrop as a sky-high oil price would eventually dampen consumption and delay global economic recovery. OPEC and CFTC will act so as to prevent price from surging excessively.
According to OPEC's Secretary-General Abdalla El-Badri, the cartel may consider increasing production in December in order to keep prices in a range of 75 to 80. Yet, an increase in OPEC output will also depend whether stockpiles have returned to the 5-year average and floating storage has been eliminated. While it's uncertain whether the 2 criteria can be accomplished by December, increase in supply may not be effective as there's not enough demand to absorb.
CFTC may set higher limits in energy markets. Moreover, the committee may require more derivative transactions onto clearinghouses.
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