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…
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 technical analysis suggests the market is severely oversold.
Natural Gas Outlook
Trading in natural gas futures in 2014 proved to be a tumultuous adventure this year with the market soaring on increased demand in January and February, while succumbing to increased supply and lower demand in December. Both the rally and the sell-off were strongly correlated to the weather.
Producers were content with injecting new product into inventory on a consistent basis throughout the year. This allowed professional traders to maintain a steady short position during the same time period. Periodic weather changes throughout the year caused “spikes” on the charts, but most of these were short-covering rallies. It is safe to say that it is very difficult to find a period during the year which featured a prolonged period of time where demand outstripped supply.
At the start of 2014 the U.S. faced cold weather, but the temperatures were severely below average and the cold was lingering. This current winter has been very mild compared to last year at this same time and the price action is reflecting this. It is winter so there will be increased demand, but since the weather services are all predicting normal temperatures over normal periods of time, aggressive traders should play for the periodic rallies, while waiting for another opportunity to short at a more favorable price levels.
Unleaded Gasoline
Since Unleaded Gasoline futures are highly correlated with crude oil futures, a bottom in crude oil should result in a bottom in gasoline. However, there are times when gasoline will rally while prices continue to decline in crude oil.
With gasoline futures rapidly approaching a key support area, traders should not sell this market blindly because crude continues to weaken. Short-sellers should be careful pressing gasoline prices lower when the market reaches the 1.3200 to 1.2100 price zone. The downside momentum created by the sell-off in oil may slow down in this price area, but the trend may not necessarily change to up.
Professional traders like to trade spreads in the energy complex so it is possible that we may see periods where gasoline rallies and crude oil continues to break. This may occur when gasoline reaches the potential support zone.
Summary
Traders should continue to look for lower crude oil prices as long as production remains at current levels. The market is likely to bottom when either OPEC cuts production or the number of wells producing in the U.S. drops significantly. There may be periodic news driven short-covering rallies but these will likely be sold until production is reduced.
Natural Gas prices should remain weak and near all-time lows. Periodic weather related rallies may occur but they should be short-term in nature unless there is a prolonged period of severely below normal temperatures. It is going to take a combination of production cuts and increased demand to produce a long-term rally in this market.
The gasoline market is bearish but operates on its own fundamentals. Overall, the biggest influence on the market will be crude oil prices, but there will be periods where gasoline moves in the opposite direction of crude especially when it reaches key support areas. Refineries have the power to produce gasoline or not produce gasoline so they ultimately control the inventory. It’s easy to follow the downtrend, but traders should be prepared for bottoming action in this market before crude oil if the long-term support holds.
