Quake Presents Unique
Today's Idea
The natural disasters in Japan may alleviate supply pressure in the near-term as the country rebuilds. The build in US supplies also sets a negative tone for the market in the near-term, further widening the contango. Technically, Crude Oil has held support at the $100 level, but a close below that mark could bring selling pressure. Some traders may wish to consider entering into a Crude Oil futures spread by buying the June and selling the April contract for 1.50 or lower to the buy side and an objective of 2.25.
Fundamentals
The earthquake, tsunami and subsequent problems with nuclear reactors give energy traders quite a bit to digest. On one hand, the terrible situation in Japan is likely to have a negative impact on economic activity in the world's third largest Crude Oil consumer. Factories and refineries in the northeastern part of the country, which suffered the brunt of the disaster, are expected to remain closed. Refineries in this region alone account for roughly 1.33 million barrels a day of capacity. The diminished demand from Japan will likely overshadow the political turmoil in the Middle East in the near-term. Long-term, however, the demand for fossil fuel could see an increase due to the problems with several nuclear reactors following the natural disasters. Even if a meltdown is averted, anti-nuclear sentiment could mount. The nation is too densely populated to simply rely on alternative energy – the technology is simply not there yet. This could result in an increase in fossil fuel plants to provide a safer means of energy. The result of the difference in near and long-term demand outlooks could result in a steepening of the Crude Oil contango.
Technical Notes
Turning to the chart, we see the April Crude Oil contract holding support near the $100 level. A violation of the $100 mark on the downside would be a technical and psychological setback for Oil bulls. The next area of support would then come in just below the 93.00 level. Despite the recent selling pressure, the RSI remains near overbought levels on the RSI, suggesting the market may find some selling pressure in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
