Walking the Tightrope?
Fundamentals
OPEC member states voted against cutting production quotas for the fourth consecutive meeting, as the cartel tries to avoid acting as a roadblock for the global economy. Oil bulls may want to step back and reevaluate their position after the meeting. Prices have edged closer and closer to the $50 a barrel mark recently on shrinking global surpluses, a sign that existing production cuts are beginning to work. Many traders were banking on the cartel cutting production once again and overshooting the mark, in that supplies would tighten at a quicker pace than OPEC had intended. While petroleum demand has been especially price sensitive since the beginning of the downturn, the world still needs the commodity to function in the worst of times. China has been extremely busy in recent weeks securing access to base metals and petroleum, suggesting the world's most populous nation expects to be back on track economically sooner rather than later. The inaction on OPEC's part may have been the best and wisest decision given the circumstances. In the short-term, traders may view the decision as bearish, and prices could give back some of the gains made over the past month. After the knee-jerk reaction, however, prices could stabilize and trade range-bound, which would avoid any undue stress on the global economy and result in OPEC receiving as fair a price as they can for the time being.
Crude Oil has been stabilizing in recent weeks for a number of reasons. Inventory data released over the past month has shown a significant slowdown in the rush to storage after the Cushing, OK delivery point for the NYMEX contract neared capacity. The fact that so many traders caught on to the gimme trade may have spooked some traders. Also, the United States Oil Fund (USO) changed their roll procedure, opting to roll positions over a week instead of one or two days, making it more difficult for traders to take advantage of the roll. This has caused the contango to narrow significantly. The resolve of shorts has been tested after prices failed to set new contract lows, not only in Crude Oil, but other very economically sensitive commodities such as Copper. Shorts have headed for the exits, but whether it is for good or not remains to be seen. Some of the traders that were short and decided to cover could be waiting in the wings for a fresh opportunity to become short the market once again. Traders will also be keeping a close eye on equity prices to gauge direction.
Technicals
The April Crude Oil contract continues to trade sideways, unable to gain a longer term direction, which can be seen as good news for those bullish over the long haul. Short-term traders may view the chart as somewhat bearish, after prices had twice flirted with the 49.00 level only to fall back. The chart looks as though it may be on the verge of forming a small M top, which suggests that the market may be looking to test mid-February lows. The failure of prices to hold the two recent closes above the 50-day moving average suggests the market is not yet ready to change direction, leaving a downside bias. Prices came down to test the 20-day moving average and have held the average in overnight trading. Failure to hold the average would suggest that a near-term high may be in place.
Rob Kurzatkowski, Senior Commodity Analyst
