Will bulls or bears be in for a "Crude Awaking"?
Fundamentals
Bulls and bears seemed to have hit a stalemate as to who will control the direction of the Crude Oil market, as prices have been confined to an increasingly narrow band lately. Any attempts to push prices below $40 are met with willing buyers trying to pick a bottom in a market that has fallen over $100 from all-time highs less than a year ago. Rally attempts have been thwarted, as lackluster demand and ample supplies have fundamental traders keeping the sell-side of their trading cards full. So what will it take to move Oil prices out of their trading range? Well, here are a few bullish and bearish factors that traders may consider to find clues as to where Oil prices might be heading. First of all, look at the direction of spread differentials for nearby futures vs. more deferred months. Currently, NYMEX futures are in a contango, where nearby futures trade at a lower price than more deferred months. This scenario usually occurs when current supplies are more than ample to meet demand and the market is "paying" producers to store the commodity rather than sell into the current market. The supplies of deliverable Crude against the NYMEX contract continue to grow, which has caused the spreads to widen. Bullish traders would want to see near-term futures begin to gain on the deferred months as a sign that near-term demand is beginning to improve. Watching the weekly EIA energy stocks report and focusing on the trend of Oil supplies can give traders a sense of how supply and demand are changing. Additionally, look for the adherence rates for production quotas out of OPEC. Although OPEC has cut production levels to deal with declining demand, it is estimated that adherence to these quotas is running about 75% or so. Some of the biggest "hawks" calling for production cuts, such as Iran and Venezuela, are among the biggest violators of their agreed upon production quotas. We should remember that these countries depend heavily on Oil revenues to fund government programs and may actually produce more oil as prices decline to keep up their cash flow-a bearish sign. Finally, watch the chart action. When markets are in a consolidation phase, a breakout above the highs of the consolidation pattern or a breakout below the lows of the consolidation on higher than average volume can be considered a sign of the direction of the next move in a market. More conservative technical traders would like to see a daily or even weekly close outside of the consolidation to further help weed out "false breakouts".
Technicals
Looking at the daily chart for March Crude Oil, we notice a market that has been making lower highs and higher lows since late last year. Notice how daily volume has steadily declined since March became the front month contract in late January. These are classic signs of a market in consolidation. Though it appears that Oil bears may be holding the upper hand, neither side can feel entirely comfortable with their positions. Major support remains at the contract lows of $38.00, with strong resistance seen at the recent highs from 1/26 of $48.59.
Mike Zarembski, Senior Commodity Analyst
