Despite Gyrations, Oil Volume Falls
Thursday, December 22, 2011
Crude Oil has finally gotten a bit of good news over the past several sessions, which is a welcome change for Oil bulls, who have seen prices dragged down by the myriad of bad news out of Europe. The ECB's move to increase liquidity could be beneficial to bulls, as it could lead to a stabilization of Eurozone banking and inflationary pressure. However, risks to Oil demand remain as the holiday shopping season comes to a close, and Europe remains a mess. Technically, the Crude Oil contract has been a difficult one to read. After appearing to possibly be on the verge of breaking out to the upside, the market forms what looks like a double-top that may be invalidated. Despite the market gyrations, volatility as measured by OVX is at the lowest levels in four and a half months. Some traders may perhaps wish to consider entering into long straddle or strangle with the expectation that volatility will increase - for example, a 98.50 straddle at 6.50, or $6,500. This is an expensive strategy and may not be suitable for all traders.
Fundamentals
Crude Oil surged almost five dollars over the past two sessions, lifted by ECB lending and the largest drawdown in Oil inventory levels since February 2001. The European central bank has been looser with loans lately, which may help keep European banks solvent, or at the very least, delay defaults. The move may also help the Eurozone avoid a prolonged recession, which may stabilize petroleum demand. The EIA shocked many market observers with a 10.6 million barrel drawdown, which was well in excess of the median analyst estimate of a 2.13 million barrel draw. Products also saw some destocking, as gasoline saw a draw of 412,000 barrels and distillate inventories shrunk by 2.35 million barrels. Surprisingly, demand has been strong, increasing to 19.3 million barrels a day. Much of this can be attributed to the rise in distillate demand, which can be seen as seasonal. While the total demand for petroleum did increase 5%, the seasonal demand from trucking during the holiday season and the heating oil demand during the winter months made up much of this demand. Also, 19.3 million barrels a day is around the medium petroleum demand figure, which is hardly jaw dropping. Crude Oil may stay between the 95 and 100 dollar levels in upcoming sessions, as many traders await next week's inventory data to give a clearer picture as to whether the massive drop in inventories was a one-off event or, possibly, the beginning of a trend.
Technical Notes
Turning to the chart, we see the February Crude Oil contract snap back quickly after trading down to support near the 94.00 level. Prices may soon face stiff resistance just north of the $100 level. It will be difficult to sell Crude Oil bulls on a breakout above the $100 mark, as the previous four attempts have resulted in the market selling-off. A breakout above 100, however, would invalidate the double-top formation confirmed last week. The result could be a stalemate between the bull and bear camps and sideways trading. Yesterday's close above the 20 day moving average suggests that a near-term low may be in place.
Rob Kurzatkowski, Senior Commodity Analyst
