Fed Rate Cut May Add More Fuel to Energy Markets
$82 a barrel and climbing! That’s the story in the Crude Oil futures market of late, with the soon-to-expire lead month October contract trading at or near all-time high prices this morning. Oil prices have risen 11% so far this month alone, despite the U.S housing slump and concerns that U.S. economic growth rates would start to sag. With the Fed lowering rates by 50 basis points yesterday and the market anticipating further cuts into the 1st quarter of 2008, energy prices look poised to continue their climb, especially if the Fed’s “jumpstart” helps stimulate further increases in Oil demand. This all comes at a time when the market is looking at relatively tight Oil supplies, as the NYMEX WTI futures market is trading in a backwardation. This means that traders are willing to pay a premium for near-term delivery. The October/December 2007 Crude Oil spread is currently at a $2.60 October premium, which encourages those holding Oil to sell into the spot market as opposed to storing Oil for later use. So it should come as no surprise that traders are looking for another decline in U.S. Crude Oil inventories last week. In today’s EIA energy stocks report, analysts are looking for a decline of between 1.5 and 2 million barrels of Crude for the week ending September 14th. This would be the 10th decline in the past 11 weeks. Gasoline inventories are also expected to fall, with estimates calling for a 1.3 million barrel decline. Distillates – which include Heating Oil – are expected to show a gain of 1 million barrels. However, continued refinery outages are expected to produce a decline in refinery utilization to 90%, down 0.5% from the previous week. If that is not enough to send Oil bulls into a frenzy, a weather disturbance near the eastern coast of Florida has the potential to strengthen as it moves into the warm waters of the Gulf of Mexico. In fact, it has been reported that Shell has evacuated about 300 workers from the Gulf as a precaution, due to the tropical disturbance. Should a major storm develop, it could be a long rest of the week for Oil bears!
Looking at the daily chart for November Crude, we notice prices continuing to hang around contract highs. November Crude becomes the lead month tomorrow, and prices are still about $1.30 below that of the expiring October contracts. Prices are well above the major moving averages, but the 14-day RSI has reached overbought territory with a reading of 85.83. Spread trading will be active this morning as traders still in the October contract switch their positions over to November before the October contract goes off the board at 1:30 PM Chicago time today. Resistance for November Crude is seen at $81.50, with support found at $77.30. In early trade, November Crude Oil is trading at $80.76, up $0.53.
Mike Zarembski, Senior Commodity Analyst
