Technical Analysis
Nymex Crude Oil (CL)
Crude oil's correction from 82.00 continued last week. Despite intra-week strong recovery, crude oil was limited below 82.00 high and weakened to new weekly low on Friday, indicating that such consolidation is still in progress. Initial bias is on the downside this week and further fall should be seen to 38.2% retracement of 65.05 to 82 at 75.53 first. Break will target 61.8% retracement at 71.52. On the upside, break of 80.46 minor resistance is needed to indicate that fall from 82.00 has completed. Otherwise, outlook will remain bearish.
In the bigger picture, with daily MACD crossed below signal line, a short term top should at least be in place at 82.00. Considering bearish divergence condition in daily MACD, whole medium term rebound might have completed too. FOcus now turns to trend line support (now at 70.48). Break there will add more credence to this case and bring deeper decline to 58.32 cluster support (50% retracement of 33.2 to 82 at 57.60) for confirmation. On the upside, above 82.00 will indicate that rise from 33.2 is still in progress. However, as we expect such rise to conclude inside resistance zone of 76.77/90.24 (38.2% and 50% retracement of 147.27 to 33.2), focus will remain on loss of momentum and reversal signal even in case of another rise.
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 ( 2 November – 8 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
Crude oil erased all the gains made Thursday as investors doubted if current economic backdrops and energy fundamentals justify oil price of 80. Moreover, decline in US consumer spending and worse-than-expected personal income increased skepticism that economic recovery is sustainable. WTI crude oil price for December delivery dropped -3.6% to 76.99 Friday, fully offsetting the rally made after strong US GDP data. The benchmark contract lost -1.4% last week but added +9% in October.
Price movement was volatile last week. Earlier in the week, commodities plummeted as US consumer confidence and homes sales data disappointed investors. Conference Board reported that consumer confidence surprisingly fell to 47.7 in October from 53.1 a month ago as pessimism over the job market lingered. New home sales dropped -3.6% to 402K in September while August reading was revised down to 417K. Market sentiment recovered after US economy grew +3.5% qoq in the third quarter, beating market expectation of +3%. However, risk aversion emerged again towards the end of the week.
In fundamental news, investors were disappointed by the builds in crude and gasoline inventories. Although distillate inventory has finally turned south, the driving forces were lower refinery capacity rather than improving end-user demand.
The weakest link in the energy market remains to be demand/supply outlook in distillate. Although distillate stockpiles drew -4mmb in the past 3 weeks, at 167.75 mmb, current inventory level remained well-above historical average. In terms of 'Days of supply', distillate inventory has stood at around 48 days in the past 3 months while historical average was around 32 days. On the demand side, implied distillate consumption has showed improvement on weekly basis with the trough probably seen in July. However, distillate demand is still dropping on year-over-year basis. These figures suggest that despite recent modest improvement, the big picture still demonstrates a sluggish distillate demand outlook.
Another important issue for the week is Saudi Aramco's (the state oil company in Saudi Arabia) decision to switch its pricing of crude oil from WTI to Argus Sour Crude Index (ASCI) from January 2010.Industry experts said that the state company has been considering the switch since 2007 after the dislocation of WTI from global oil market due to a lack of storage at Cushing (where WTI crude oil is delivered). Since December 2008, the surge in Cushing stock has weighed on the value to WTI against other global benchmarks. The chart below shows that WTI has traded at discount to Brent crude for most of the time in 2009. However, this was against the norm that WTI should be trading at a premium of 1-2 dollars to Brent as WTI crude is lighter and sweeter than Brent crude.
Although the impact to liquidity of WTI contract is insignificant, it highlights the reliability of WTI pricing as a global benchmark. Shortly after the announcement, CME (operator of NYMEX) responded by launching 2 new futures tracking sour crude. Moreover, CME said that as the Argus index is calculated as a differential to the NYMEX light sweet crude settlement price, the new policy 'actually ties the Saudis to the WTI market more effectively and more closely, but in a way they want to be'.
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