Crude Oil Outlook
Nearby crude oil prices are poised to finish the year near their lowest levels since May 2009. Although there was bottoming action at the start of the week because of infrastructure damage in Libya, the short-covering rally did not last and short-sellers resumed their activity. This served as further proof that oversupply concerns are the main issues at this time and that traders are not too worried about minor output curtailments.
With traders looking for a longer-term solution to the oversupply issue, the focus is on U.S. and OPEC output. In the U.S., the number of rigs drilling for oil dipped in the latest week. According to the oil services firm Baker Hughes Inc., the rig count may be declining, but it is still up from a year ago, indicating that oil is still flowing heavily. OPEC is still producing about 30 million barrels per day, having passed on an opportunity to slash production at its last meeting on November 27.
Based on these two factors, one can conclude that prices will continue to decline until the number of U.S. rigs producing oil drops dramatically over the short-run, or OPEC decides it’s time to cut production.
The hedge and commodity funds are still short, but the price action earlier in the week to the potentially bullish news out of Libya suggests they are looking for any good excuse to start taking profits and covering their short positions. When the news hits, the market should turn fast because…