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Crude Oil Prices Consolidate but at Lofty Levels

Friday, March 16, 2012

Ideas that Crude stocks will continue to build in Cushing, Oklahoma ahead of the start of the Seaway Pipeline may pressure near-term WTI futures. Some traders who are looking for this scenario may perhaps wish to explore bear spreads in WTI Crude Oil futures. For example, December 2012 Crude is currently trading $1.91 over the May 2012 contract. Traders choosing to initiate a bear spread could buy December Crude and sell May Crude, with the expectation that the December premium will widen further.

Fundamentals

The bull market in Crude Oil futures has entered a consolidation phase, as many traders weigh potential tightening supplies out of the Middle East vs. a stronger U.S. Dollar and slowing economic growth out of China. WTI Crude traded on the NYMEX seems to have found a comfortable $5 price band, with 105.00 appearing to be strong support and 110.00 acting as strong resistance. This week's EIA report presented a mixed picture for traders, as Oil inventories rose by a greater than expected 1.750 million barrels last week. However, Oil products including gasoline and middle distillates fell more than expected, as refinery runs fell to 82.7%, vs. 83.9% last week. The build in Crude supplies was particularly acute in Cushing, Oklahoma, which is the delivery point for the NYMEX futures, as inventories rose by 2.519 million barrels to stand at 38.697 million barrels -- the highest inventory levels since June of last year. It appears that Oil is being put into storage in Cushing in anticipation of the June opening of the Seaway Pipeline, which will now allow Oil to flow from Cushing to refineries on the Gulf Coast. Until that time, we may see Oil inventories continue to build at Cushing, which may favor a continuing widening of the spread between the price of Brent Crude and WTI, which has increased by nearly $12.00 since the beginning of 2012.

Technical Notes

Looking at the daily chart for May Crude Oil, we notice what appears to be a "Descending Triangle" formation. This is generally considered to be a bearish pattern, and we should see volume begin to decline as the pattern is forming. The 14-day RSI has tumbled from overbought readings above 70 to a more neutral reading of 50.96, which has occurred concurrently with the formation of the Descending Triangle pattern. The next support point is seen at the uptrend line drawn from the October 2011 low currently near the 102.90 area. Resistance is found at the contract high of 110.95.

Mike Zarembski, Senior Commodity Analyst