April 30, 2008

Analysis of today’s events:

The fed decided to cut the benchmark rate .25% as was expected. The dollar did not show much reaction to the news, reflecting the fact that this was already priced in. The Fed did express concern about rising food prices and inflation overall which leads one to believe that rate cuts may stop in order to strengthen the dollar.

How this affects crude oil:

The weaker dollar has been one of the primary causes for the increase in crude oil prices as well other commodities over the last 2 years or so. A stronger dollar will slow down the current bull market dramatically as dollar-priced commodities get more expensive for non-dollar currencies.

Crude Oil Technical Analysis:
Looking at the one chart we can see that crude went from about 100 to a high of 120 before the pullback last few days. On 4/29 crude met support at 115 before slightly rebounding. Today (4/30) it broke through the 115 level and went as low as 113.8 before closing at around 115. This suggests that 115 may be a local resistance level as long as this pull back is occurring. Next level to watch is 112.50 (which also happens to be a Fibonacci level) and then about108.8. It would not be surprising to see prices range between 115/118 and 109 before breaking out again on the upside. Long term fundamentals have not changed for crude oil and natural gas and the trend is still bullish long and medium term. Its also interesting to note that RSI signaled an overbought level even as prices fell today which is a sign that price may fall rather sharply and quickly through these level once the buying pressures dies down.

Awaiting the Feds decision…

Wednesday, the Federal Reserve will end two days of intense meetings and decide on monetary policy. There has been an underlying sense of uncertainty in the market awaiting the Feds decision on interest rates.

On September 18, the Federal Reserve cut the key interest rate for the first time in three years by 50 basis points to 4.75% in order to stimulate the slowing economy and counter the precipitous drop in the housing market. Since then the Federal Reserve has cut interest rates another 250 basis points to 2.25 percent.

What variables will the Fed consider..?
-The Housing market- which is at multi-year lows
-Inflationary pressures i.e. Oil and food prices
-Employment numbers
-GDP numbers
-The Dollar

It has been the consensus that the Fed will cut another quarter point for pure market psychology to 2 percent. However, the main focus of the meeting will be the Feds comments on inflation and future action. If the Fed implies that they are hawkish on inflation that will strengthen the dollar and possibly break the trend in the commodities market. However, if the Fed stresses that they will continue on the current path to stabilize the credit and housing markets the current trends are indubitably intact.

A lot can happen in one day!

In Tuesday’s trading session, crude oil fell more then $3 to settle at $115.63 a barrel. While Gasoline futures eased $.0912 to settle at $2.939 a gallon. The energy complex was under numerous influences. First, the major North Sea oil platform in Scotland came back online, the strengthening of the dollar in the face of the Feds decision, and the IEA report on crude and gas demand. The report stated that demand for petroleum products dropped 8.5% and demand for gasoline fell 6.2% in February. Alleviating some concerns on supply/demand imbalances.

However, one should not put to much merit into one report. The landscape is changing on a daily basis with incessant volatility, where traders should move ahead with cautious optimism deciphering all pertinent data (The Fed, dollar, inventory numbers, Nigeria, Iran, market politics, etc.) and hedging their trades fittingly. It is my opinion that we are in a long-term multi-year bull market and the tides didn’t turn just yet.

Note for safe bet: earnings, earnings, earnings. In the energy complex, I like the drillers. Whether oil is at $100 or $130 a barrel it is still profitable and should report strong numbers. As for the rest of the market concentrate on companies that have good earnings and are still making money. Even with the recent run-up, there are still value plays left.

Crude and the energy complex…

The combination of recent refinery problems, the weakening dollar, speculative buying, and rising global demand will cause a precipitous spike in crude oil and its products.

In Scotland, we got news that workers walked of the job at a major North Sea oil pipeline that produces over 700,000 barrels of oil a day. It is estimated to cost over $100 a-day in lost production. Furthermore, two of the largest oil companies cut production by an unspecified amount at their Nigeria Niger Delta refinery due to militant attacks. Nigeria, the worlds 8th largest supplier of oil has suffered four pipeline bombings last weak further tightening world production. According to recent studies, world crude oil supplies are already down 6% from a year ago. The politics of the Middle East still remain tense, as seen last week’s incident with Iran. Roughly 20% of the world’s oil flows through the Strait of Hormuz that Iran has the ability to block. This married with the weakening dollar and the speculative inflation hedge further puts upward price pressures on crude oil and its products.

$125, $130?? In the short term i see higher prices, however, in the future, due to the politics of the market i do see a pullback in prices.

Keep your eye on RBOB…

Gas prices extended further into record territory surpassing $3.55 a gallon on more news of tightening supplies. Gasoline inventories unexpectedly fell 3.2 million barrels last week raising concerns of future fuel supply levels as we approach the peak summer driving season.

Could we see $4 a gallon at the pumps?

RBOB futures have followed the rest of the energy complex higher in recent sessions. Gasoline prices that we pay at the pump are influenced by a number of factors; the futures market, crude oil prices, the dollar, and refinery utilization. The crude-gas crack spread has been widening causing refiners to cut production due to low profit margins. Refiners have been unable to raise gas prices in conjunction with the soaring cost of crude. Moreover, there is a shortage of a necessary additive for making summer grade gas called Alkylate-Further putting upward pressure on the price of gasoline.

On a percentage basis, there is tremendous upside potential in RBOB futures.
Higher crude prices+falling dollar+tightening supplies+speculation= higher Gasoline cost

Keep your eye on crude…

Crude oil retreated early in the trading season Wednesday on anticipation of the release of DOE inventory numbers. According to recent surveys, forecasts are expected to show a build in crude supplies of 1.2-2 million barrels, while gasoline stocks are set to decline 2.5 million barrels.

This a day after both reached and closed at record levels. Crude oil futures closed at $119.17, after an intraday high of $119.90 a barrel. The current contract for June delivery closed at $118.07 a barrel. Looking out in the future, we see all long-dated oil contracts over $100 a barrel, illustrating the troublesome supply/demand fundamentals.

How to trade this market..?
Look for another surprise draw in the inventory data, leading to higher prices.

The long-term fundamentals are still in play. Global demand continues to rise in the face of the precipitous increase in prices with no sign of future demand deconstruction. On the supply side, currently we are suffering the constant disruptions from; Nigeria, Iraq, Mexico, Russia, etc, and future supply is in jeopardy due to LACK of REinvestment in oil and gas industries. We have seen a continual decrease in oil production from countries like Mexico, Venezuela, and even Russia due to deterioration in drilling platforms from lack of maintenance.

Moreover, we have seen an influx of investment from pension funds and commodity index funds, which tend to invest for the long-term.

All factors adding to the outlook on higher oil prices.

Crude Oil and the energy complex…

Today, crude oil futures settled at an all time high of $117.48 after touching an intraday high of $117.76 a barrel. RBOB closed slightly lower at $2.98 after reaching a record of $3.00 a gallon. Moreover, natural gas closed at the highest levels since December 05’, settling at $10.72 btu. Once again, heating oil led the energy complex higher, closing at $3.31 a gallon.

The entire energy complex moved on the news of supply disruptions in Nigeria and the continuing depreciation of the US dollar. Still supported strongly by fundamentals, the energy complex has been responding to the tightening supply and rising global demand that support higher prices across the board.

How to trade this market..?

It’s not too late to make money in the energy market, there is tremendous upside left. Investors can gain exposure a number of ways; buying the physical commodity, futures, or stocks that have exposure to the energy market. For the later, investors should concentrate on stocks exposed to oil and natural gas, especially the oil/gas exploration, drillers, riggers and transport, such as; RIG, OXY, GW, and CHK to name a few.

Moreover, concentrating on crude oil, all the technical indicators point to higher prices and suggest that’s it a strong buy. In tomorrows trading session, if crude oil trades thru the 1st resistance level of $118.32 it will trade up to the 2nd resistance level of $119.17 a barrel before profit taking.

Keep your eye on crude…

In trading today, we see crude oil weaker caused by the strength of the dollar bouncing off its lows of past sessions and from shear profit taking in crude.

Crude oil, in yesterdays trading reached levels never before seen. Continuing the recent driving force of prices, US light Sweet Crude peaked at $115.54 a barrel. While in London, Brent Crude traded at another record of $113.29 a barrel.

The bullish inventory report acted as a catalyst to the markets. The Department of Energy’s report showed a surprise drop in US crude inventories and a larger-than-expected drawdown in gasoline inventories. Which sparked rising fears that there wouldn’t be enough supply to meet the demand for fuel during the summer driving season.

How to trade this market..?

Buy the dips!! Its only going higher..!

Keep your eye on Crude….

The recent run-up in crude oil to new highs has sparked a new wave of interest and buying in the energy complex.

Crude oil in pre-market trading crossed into uncharted levels to a new record high of $113.66 a barrel.

Firstly, due to a substantially weaker dollar-which has held near record lows this week against the Euro. A weak dollar causes dollar-denominated commodities to become more attractive to foreign investors.

Furthermore, it comes down to supply/demand fundamentals. With rising demand, any supply disruptions causes tremendous ripples in the energy complex. With constant infighting in Nigeria, the war in Iraq and the recent shutdown of three key oil exporting ports in Mexico puts upward price pressures on the energy complex and directly supports higher crude oil prices.

Moreover, technically crude oil is strong buy. All short-term and long-term technical indicators point to higher prices. If Crude trades through the intraday record of $113.66, it will test the first resistance level of $113.99 a barrel. If it closes higher than the 1st resistance level it should trade to $114.76 a barrel. My opinion hasn’t changed, traders should only be long this market.