Oil bears do the tango for the widening contango
Fundamentals
Crude Oil futures continue to deflate at an astonishing rate since the "bubble" burst in July, as the global recession continues to hurt demand. OPEC has once again lowered its estimate for global demand by an additional 20,000 barrels per day in 2009 to 85.66 million barrels. This lack of demand has caused U.S. Oil stocks to soar, with the EIA reporting that Crude inventories increased by 1.14 million barrels last week to stand at 326.6 million barrels. This current lack of demand has caused Crude Oil futures spreads to collapse, with near-month futures falling faster than the deferred contract months. Current demand is so weak that Oil futures are now trading in a contango, which is where near-term futures trade at a lower price than more distant months. These Crude spreads have widened to such a great extent that some large trading firms have actually begun leasing oil super tankers to store oil, and then sell deferred futures to lock-in the higher prices available longer term. Oil storage in Cushing, Oklahoma, the delivery point for the NYMEX futures contract, rose by 2.5% last week to stand at 33 million barrels. In a sense, this contango in oil spreads is acting like a sort of "reverse bubble", and we can see the havoc wreaked on the Oil market when the bullish Oil bubble burst in July. With more and more large traders continuing to bear spread Oil futures, the set-up exists for a sharp correction in these spreads should Oil demand begin to grow or a major supply disruption take place as these speculative accounts rush to unwind their bearish trades.
Technicals
Looking at the daily chart for March Crude Oil, we notice prices falling to 2-week lows after the bearish EIA energy stocks report. The situation in the soon-to-expire February contract is even more bearish, as traders roll-out of their contracts to avoid taking delivery. The Feb/Mar spread as of this writing has fallen to an $8.50 Feb discount to the March contract. Prices have once again fallen back below the 20-day moving average after the brief short-covering rally failed last week. Momentum continues weak, with the 14-day RSI reading 41.20. The next support point for March Crude is seen at the 12/29 lows of 40.57, with major support at the contract lows of 38.00. Resistance is seen at the 20-day moving average near the 45.10 level, with major resistance at the recent highs made on 1/6 at 54.74.
Mike Zarembski, Senior Commodity Analyst
