Prices are hovering near least week’s closing levels as we enter what will likely be another volatile and interesting week. This Wednesday will be a kind of double witching day as the EIA releases its normal weekly oil inventory report and OPEC holds a monthly meeting. We do not think the OPEC meeting will be very eventful as the odds are on OPEC just approving a roll-over of the current agreement. Prices are too high and inventories (although building) are still below the level that existed when OPEC last intervened in the market and cut production (Oct, 2006).
So that leaves oil inventories as the most likely driver of the week (barring any unforeseen Geopolitical events). Inventories have been bearish for the last several weeks. However, the market has pretty much discounted the fundamentals and has focused mostly on the weakening US dollar as the principal mover of oil prices. Most of the usual Geopolitical hotspots were quiet over the weekend so for the moment we do not see that as impacting prices (right now).
The oil complex (as well as many other commodities) remains over-valued and extremely susceptible to a significant correction to the downside. In fact, I would actually call the current price activity , especially in the crude oil market, as a bubble. The last $10 to $15/bbl has been driven by an emotionally charged market sentiment and more as a hedge against inflation (due to the falling dollar) rather than anything remotely fundamental. Bubbles eventually burst and oil will not be an exception. The only issue is when will it happen?
Until we see some stability in the US economy (as measured by the equities markets) the majority thinking is looking for strong intervention by the US Central Bank (cutting interest rates) thus putting additional pressure on an already weak dollar keeping the oil complex as well as the commodity complex as a grouping firm.
From a speculative perspective it is way too dangerous to play this market from the short side. In fact the specs should remain long with very tight trailing stops so as not to get caught in any major correction to the downside. From a buy side hedging perspective the only strategies worth employing is an options spreading strategy (debit call spread preferable at this stage of the move) to allow market participation when the correction comes. All new hedge strategies that are employed should be very short- term in duration (the next week at best) as the market can change direction on a moment’s notice and with little warning.
Currently prices are drifting lower as the US Dollars is marginally firmer in overnight trading.
| Current Expected Trading Range | | | ||
| | 3/3/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:46 AM | Yesterday | | |
| Apr WTI | $101.31 | ($0.53) | $103.25 | $99.20 |
| Apr HO | $2.8109 | $0.0040 | $2.9200 | $2.7100 |
| Apr RBOB | $2.6638 | ($0.0061) | $2.7000 | $2.5200 |
| Apr NG | $9.340 | ($0.026) | $9.800 | $8.700 |
| | | | | |
Dominick A. Chirichella
Energy Management Institute
tel 646.202.1433
fax 801.383.7510
www.advancedenergycommerce.com
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