Black Gold?
Crude Oil futures continue to hover near 5-week highs this morning, after yesterday’s release of the weekly EIA energy stocks report showed that Crude Oil stocks fell by 3.97 million barrels last week, or more than twice the average analyst estimate. This was the 8th time in the past 9 weeks that Oil stocks have fallen, and the continued backwardation in WTI futures appears to suggest that the market considers the current demand strong and supplies tight. However, OPEC has a different opinion, with at least five members of the cartel having stated that the current supply of Oil is adequate to meet demand and that OPEC output should remain unchanged. Also supporting the Crude market is a “weather premium” being placed on current prices, as the Atlantic hurricane season is still in its prime. Traders are reluctant to hold large short positions in Crude, should a tropical storm disrupt the Oil infrastructure in the Gulf of Mexico. Another take on the continued rise in Oil prices is that some traders and investors are looking at Oil as an inflation hedge, adopting a portion of the role that Gold usually plays in this regard. However, if the recent credit market turmoil does spark a worldwide economic slowdown, then Oil prices may be ripe for a steep fall.
Looking at the daily chart for October Crude Oil, we notice a steep rise of nearly $9 since recent lows were made on August 22nd at $68.63 per barrel. During this time, prices have risen well above the major moving averages, and momentum looks strong. However, the 14-day RSI has moved into overbought territory with a reading of 78.67. Also, the contract highs of $78.15 made on August 1st need to be challenged soon, or a potential double top pattern may be forming, which could signal a correction in prices. In early trade, October Crude Oil is trading at $76.67, up $0.37.
Mike Zarembski, Senior Commodity Analyst
