Crude Oil Outlook
Oversupply continued to make it hard for crude oil to find a bottom last week although technical analysis factors did manage to help halt the slide at $53.94 at least temporarily. The bottoming action was strong enough to take out the previous day’s high for the first time since November 21. This doesn’t mean much to the big picture, but prolonged short-covering rallies have started from this simple chart formation.
Other than bouncing off a five-year low, the crude oil market was very tame this week. Volatility was low and the price action was orderly. This may be a sign that we are close to a bottom since a volatile market typically indicates there are large buyers still coming in to disrupt the selling process. In other words, the weak buying this week may have been the proverbial “throwing in the towel” for the last of the bottom-pickers.
This is a good development because it may mean the market may be coming close to running out of buyers which usually triggers the start of a short-covering rally. The shorts tend to panic because they have no one left to sell to in order to perpetuate the downtrend. This then causes them to buy back previously sold contracts in an aggressive fashion.
As I mentioned last week, this market isn’t going to bottom and turn higher because of a big buyer, it will do so because the shorts will decide to cover when they finally decide the risk of holding a short position is greater than the reward. This is why I remain firm in my analysis that the true bottoming signal will come from the Commitment of Traders report which shows the net long and net short positions of the major players like the hedge and commodity funds. At this time, the report shows the short-sellers are still in control.
My best guess says that over the past 30 days of trading, the Saudi’s have commented more on the status of the market than they had during the entire year up until that point. Prior to the November 27 meeting, they said they would be comfortable with $80 crude oil. They also said that they would allow crude oil to find its own support. This week they characterized the recent price plunge as “temporary” in published comments. They also added that crude demand would recover as the global economy improves.
As fast as Saudi Arabia’s oil minister Ali al-Naimi triggered a technical bounce with his initial comments, he quickly fueled a break in prices by saying that OPEC would maintain output levels in an effort to hold on to market share.
What we learned this week is that comments from Saudi Arabia can move the markets. Looking at it another way, the Saudi’s not-talking may have a similar effect. This just gave us another indicator. Maybe we have to wait for the Saudi’s to stop talking before a bona fide bottom is reached.
In other news, the Russians said they will restructure their economy to handle $40 crude oil prices. With this announcement, Russian President Vladimir Putin may have inadvertently given traders the next downside target.
This may happen sooner than you think because a dockworkers strike in Nigeria may be settled earlier than expected, which would mean that more oil will be dumped on the market.
Since the November 27 decision by OPEC to refrain from making a production cut, I’ve maintained that its primary objective is to get the U.S. to curtail its output. They want the U.S. to set the support level. The shrewd oil trader should take this to mean that they should be watching the production levels in the weekly Energy Information Administration reports and any news on the shutting down of oil wells and any cuts in exploratory drilling.
Last week’s report from Baker-Hughes on the number of rigs shutting down revealed that the OPEC plan may be working. This week, Chevron Corp. told Canadian regulators that it has “indefinitely” suspended plans to drill for oil in the Arctic. Other large oil companies slashed their capital-spending plans. These are still more small signs that we may be nearing a bottom. Continue to monitor these indicators to get an edge on the other speculators who are caught up in the price action.
In summary, there is nothing in the charts to indicate crude oil has reached a bottom. Continue to watch for short-covering rallies. These include new lows in the morning, followed by closes near the high of the session. The more frequently we see this pattern, the closer we are to reaching the final low. Also “listen” for silence from the Saudi’s. When they stop talking this market lower in the press, we may be reaching a bottom. Finally, keep an eye on U.S. production, changes in the number of active rigs, or the paring of capital spending by the major oil companies.
At this time, we are not trying to pick a bottom, but “pick-up” on any of the subtle changes that may tell us before the less-informed speculators that this market is getting ready to turn higher. Even if you are short the market and enjoying the ride, you will still have to know the right time to cover.