WTI crude is surging more than 17% in the past month. Is this a breakout in oil prices? Phil Weiss, Argus Research Group, and Raymond Carbone, Paramount Options, discuss.
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Tuesday, October 25, 2011
Phil Flynn: The Dead Spread
The Brent/WTI spread almost became a household word in the conflict between Gaddafi loyalists and the Libyan rebels. Libyan crude is of a very high quality oil that found its nitch in Europe subbing for the production challenged North Sea brent crude. The loss of that crude created a void because European refiners accustomed to a regular flow of light crude failed to have the type of units needed to refine those heavier grades. The loss of that crude caused the Brent/WTI spread to go to a record high. Now coincidentally or not, the spread has come in dramatically since Mr. Gaddafi's demise.
In fact the spread has come in from an all time high of approximately $28.07 to a mere $18.97 as of this writing. With Gaddafi out of the way the hope is that Libyan oil will once again fill that void. Well early on that is even going beyond hope. Yesterday ENI told Dow Jones that the big elephant in the room, or Libya's giant Elephant oil and gas field in Libya, could restart as early as next month and that there was "no big damage". That field accounts for almost 25% of Libya's natural gas output. A resumption of that much oil that soon obviously could ease concerns that it will take "years" to get Libyan oil production back up to normal.
That not to say that there are not some tensions as Dow Jones reports of a strike at Waha Oil Co., Libya's largest oil partnership with foreign companies, is entering its eighth week after a failure to reach an agreement over the dismissal of Gaddafi era managers, staff at the company said. Dow Jones says, "Unrest at Waha, on which U.S. partners Marathon Oil Corp. (MRO), Hess Corp (HES) and ConocoPhillips (COP) have previously declined to comment, is part of broader strife at some oil operations. It underscores the challenges still facing the country's oil industry despite the death of former ruler Moammar Gadhafi last week."
Yet at the same time the WTI has found strength as the US economy looks stronger than Europe and the decline of crude stocks at Cushing, Oklahoma, the delivery point for the Nymex WTI futures. While the world waits for Europe, data seems to suggest that the sparing over Greek haircuts (no, I am not talking about Telly Savalas) and bank rescue funds has zapped the confidence of Europe, increasing the odds of a recession.
It seems that market are also reacting to the spread sending light sweet crude to Europe as opposed to the formally oversupplied US. Gas and Oil Daily says, "Oil stockpiles in Cushing dropped 760,000 barrels to 28.1 million. The Energy Department said last week that Cushing inventories, including floating and fixed tanks, totaled 31.1 million barrels as of October 14th, down 26% from a peak of 41.9 million on April 8th." Bloomberg News says that crude oil inventories in Cushing, Oklahoma, dropped 2.6 percent on Oct. 21 from Oct. 18, according to data compiled by DigitalGlobe Inc.
They say that stockpiles held in floating roof tanks at the hub fell 760,000 barrels to 28.1 million, satellite images taken by the Longmont, Colorado based company show. In other words, the market forces are starting to correct the anomaly between the spread as oil is seeking higher prices. That is reducing Cushing supply and more than likely increasing European supply.
What is also helping is that we are seeing an increase in Nigerian exports as well. Nigeria also has the very desirable light sweet grade of crude oil. Dow Jones says that Nigeria will export 7,950,000-barrel cargos of Bonny Light in December, one more cargo than in November. They report a total of 214,516 barrels a day of QuaIboe crude will be available in December, compared with 157,000 barrels a day in November, the program shows.
This should put more pressure on "The Dead Spread" as well. It also put the WTI market in backwardation for the first time since the financial crisis began. It seems that the market is worried that with all the oil ending up in Europe, supplies may tighten in the US. It is also showing a vote of confidence in the US economic growth outlook or at least a more pessimistic outlook for Europe.
Also with oil on fire yesterday William Dudley of the Fed, fed into the flames talking about QE3D! QE is bullish for oil and with the Dead spread out of whack we could see WTI try to attract supply. While WTI flies gas prices were mute as the Brent crude should help US imports of products. Mr. Dudley is sending a signal to the market that QE is back in play and most likely will be in the form of printing money to buy back mortgage backed securities. Very bullish for WTI oil!
The Energy Information Agency has some good news I suppose. They said that the national average retail price of regular gasoline is down 1.4c to $3.462 a gallon. Yahoo! Now not that I want to ruin that god feeling you had but they also want to remind you that prices are still 64.5c a gallon, or 22.9%, higher than they were a year ago.
Want some news that might warm your heart? Reuters News points out that the average of the first 12 months of New York Mercantile Exchange natural gas futures contracts slid to its lowest in nine years on Monday as growing supplies and moderate weather weighed on the complex. The 12 month futures fell 2.3 cents to settle at $3.923 per million British Thermal Units, the lowest settle since Nov. 15, 2002, when the average closed at $3.926, Reuters data showed. Despite record heat this summer that drove NYMEX front month gas to its 2011 peak near $5, record high gas production, primarily from shale, has been the main factor pressuring price expectations.
Phil Flynn
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Crude Oil Opens Tuesday Trading Higher
Closes below the 20 day moving average crossing at 84.57 are needed to confirm that a short term top has been posted.
First resistance is the 50% retracement level of the May-October decline crossing at 95.32
Second resistance is the 62% retracement level of the May-October decline crossing at 100.08
First support is the 10 day moving average crossing at 87.72
Second support is the 20 day moving average crossing at 84.57
Crude oil pivot point for Tuesday morning is 90.05
Check out "How to Trade Gold and Oil Prices This Coming Week"
Monday, October 24, 2011
Is It Reversal Time For the Markets?
I think you’ll find today’s video interesting as the S&P 500 has made a remarkable recovery. However, it is back at a crucial Fibonacci retracement level which could present major problems for this index.
In our recent survey we asked traders if they were concerned about what is going on in Europe. A remarkable majority, over 75% said they were, and they do watch events in Europe very closely.
At this point, Europe is really the tail that wags the dog and we are not optimistic that things are going to work out in a positive fashion.
They have had a total of 13 summits in a period of 20 months trying to solve this problem. With the likes of Berlusconi, can you imagine telling him what to do? And other players like Nicholas Sarkozy shouting to Brian Cameron of Great Britain to shut up and butt out. And that’s the stuff we hear about!
Imagine the stuff we don’t heard about.
Let's look at the Trend Analysis for crude oil......
The crude oil market moved over resistance at $90 a barrel and it seems ready to test the Fibonacci retracement level of $91.80. Can this market in fact, close over resistance at $90? Our long term Trade Triangles continue to be negative and we expect they will once again dictate the tone of this market. Intermediate term traders should be on the sidelines and long term traders should continue to be short the crude oil market.
Well, December crude oil did close up $4.24 a barrel at $91.63 today. Prices closed near the session high today and hit a fresh 11 week high. Crude bulls gained good upside near term technical momentum today as prices pushed above what was a well defined sideways trading range on the daily bar chart. The crude market was boosted today by a weaker U.S. dollar index, higher U.S. stock indexes and ideas the EU debt crisis is seeing progress toward getting fixed.
Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Positive
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = + 70
Now, let’s go to todays video and look at the charts of the six markets we publicly cover and see some of those important retracement levels.
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Phil Flynn: A Bullish Start
China's flash PMI, rose to 51.1 showing expansion in the Chinese manufacturing sector for the first time since mid-summer. The first reading on Chinese manufacturing was an improvement from the final September reading of 49. Still some wonder why we have not seen China demand for oil increase.
Reuters News reports, "China's implied oil demand rose a tepid 1 percent over a year earlier in September at about 8.9 million barrels per day, the lowest rate so far this year, according to Reuters calculations based on preliminary official data released on Tuesday. Implied oil demand was calculated using China's refinery crude throughput plus net imports of refined fuel but excluding changes in fuel inventories, which China rarely publishes Fuel demand in the world's second largest oil user has, since June, eased off from the double-digit growth pace seen since late last year, as the Chinese economy grew less rapidly, but China still contributed more than half of the global incremental oil demand.
If China oil demand slows to single digit growth then prices should ease. On top of that the Chinese government has taken steps to try to rein in inflation. That potentially means that demand for oil has peaked or the Chinese are using reserves that will have to be replenished! Stay tuned!
Now the question is whether or not China will buy European bonds. Reuters News reports that French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis. Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market. Still the market is optimistic that this time, really this time, the Euro Zone will make a plan that will really work.
You can sign up for a free trial of Phil's daily trade levels by emailing him at pflynn@pfgbest.com.
Sunday, October 23, 2011
How to Trade Gold and Oil Prices This Coming Week
The past couple weeks have been tough for most investors. The recent light volume rallies which have taken place in gold, oil and stocks has been generating mixed signals for technical analysts like myself. In order avoid a large draw down on your trading capital you must focus on the long term intraday charts.
What is a long term intraday chart you ask?
It is simply a 4 or 8 hour candlestick or bar chart. For example the charts below in this report are 4 hour charts. So each candlestick represents 4 hours.
Why should you use these long term intraday charts instead of say a daily chart? There are four main reasons for this:
- If you used a daily chart then this information would be condensed showing you the daily high, low, open and closing prices. While the 4 hour futures chart shows you large multi intraday chart patterns that most traders would never see… Patterns not seen by the average investor have a higher probability of working in your favour. Also these patterns are much larger than just normal intraday patterns which you see on the 5, 10, or 60 minute charts. Remember the larger the pattern the more potential profit there will be.
- These longer time frames allow us to follow gold, silver, oil and stock indexes around the clock 24/7 using futures contracts. Think about it… regular trading hours from 9:30am – 4pm ET only allows you to see 1/3rd of the price action each day. That means you are only seeing parts of larger patterns while the 24/7 contracts show you ALL Price Action.
- The last reason you must use futures charts is for the volume readings. Futures show real volume levels which can be used for trading. So the volume you see on ETFs will not have the proper volume levels for that specific commodity or index. More times than not it almost the opposite…
- My last reason for trading long term intraday futures charts is because the price of the underlying commodity or index moves true while the ETFs which try to shadow these commodities generate false breakouts and breakdowns on a regular basis.
Let’s take a look at the charts.......
Gold Futures Contract – 240 Minute (4 Hour) Chart
Gold finally broke down from the bearish rising wedge which it had been forming through late September until mid October. I know the majority of traders, investors, and financial newsletters have already positioned themselves either long or short the metal as they anticipate the next major move.
I will agree that a large move either up or down is just around the corner but what sets me apart from others is the fact that I don’t bet my hard earned money when the odds are 50/50. I don’t pick tops or bottoms; rather I wait for a clean break out or low risk entry point. Only then will I take action. Until the blue box on the chart has been broken with some type of retest I will continue to observe and analyze the chart of gold.
Crude Oil Futures Contract – 240 Minute (4 Hour) Chart
The past month crude oil trading has been very profitable for subscribers and me. We shorted crude oil using an inverse etf in September which moved over 20% in our favour within a few trading sessions. And just last week we shorted it again for a 7.5% move in less than 24 hours.
Overall I am still bearish on oil but have moved to cash until I see another high probability setup unfolding. The recent price action in crude oil makes the odds about a 50/50 bet as to which way it will break next. This is why I have moved back to cash and pocketed the quick gain.
SP500 Exchange Traded Fund – 240 Minute (4 Hour) Chart
This chart is not the SP500 futures contract. This is just the SPY ETF but what I wanted to show was how the market was showing mixed signals. The past couple weeks price has been broadening and this can be taken two different way.......
More times than not it is seen as a bearish pattern and price generally falls afterwards. But in rare situations which I think we could be experiencing now this broadening price action can be very bullish, meaning much higher prices ahead. So I continue to observe and prepare for a possible trade setup.
Weekend Gold, Oil and Stocks Trend Conclusion:
In short, I feel the market is on the verge of a strong move. The problem is that price action, market sentiment and economic news are all giving mixed signals......…
The best position right now is in cash and if something unfolds this week to our favor, then we will get involved but I am not going to take a 50/50 guess on what the next move is until the odds are in favour to one side or the other.
The Euro Zone Wags The Gold and Silver Dog
If Greece defaults and the European situation begins to spin out of control where will money flow? It would not make sense for market participants to buy Euro’s during a default regardless of whether the default it structured or not. In fact, it is more likely that European central banks and businesses would be looking to either hedge their Euro exposure or convert their cash positions to another currency all together.
Some market pundits would argue that gold and silver would likely benefit and I would not necessarily argue with that logic. However, the physical gold and silver markets are not that large and depending on the breadth of the situation, vast sums of money would be looking for a home. The two most logical places for hot money to target in search of safety would be the U.S. Dollar and U.S. Treasury’s.
The U.S. Dollar and U.S. Treasury obligations are both large, liquid markets that could facilitate the kind of demand that would be fostered by an economic event taking place in the Eurozone. My contention is that the U.S. Dollar would rally sharply along with U.S. Treasury’s and risk assets would likely selloff as the flight to safety would be in full swing.
To illustrate the point that the U.S. Dollar will likely rally on a European crisis, the chart below illustrates the price performance of the Euro compared to the U.S. Dollar Index. The chart speaks for itself:
Clearly the chart above supports my thesis that if the Euro begins to falter, the U.S. Dollar Index will rally sharply. In the long run I am not bullish on the U.S. Dollar, however in the case of a major event coming out of the Eurozone the Dollar will be one of the prettiest assets, among the ugly fiat currencies.
The first leg of the rally in the U.S. Dollar occurred back in late August. I alerted members and we took a call ratio spread on UUP that produced an 81% return based on risk. I am starting to see a similar type of situation setting up that could be an early indication that the U.S. Dollar is setting up to rally sharply higher in the weeks ahead. The daily chart of the U.S. Dollar Index is shown below:
As can be seen from the chart above, the U.S. Dollar Index has tested the key support level where the rally that began in late August transpired. When an underlying asset has a huge breakout it is quite common to see price come back and test the key breakout level in following weeks or months. We are seeing that situation play out during intraday trade on Friday.
We are coming into one of the most important weeks of the year. Several cycle analysts are mentioning the importance of the October 26th – 28th time frame as a possible turning point. I am not a cycle expert, but what I do know is that we should know more about Europe’s situation during that time frame. It would not shock me to see the U.S. Dollar come under pressure and risk assets rally into the October 26th – 28th time frame. However, as long as the U.S. Dollar Index can hold above the key breakout area the bulls will not be in complete control.
If I am right about the U.S. Dollar rallying higher, the impact the rally would have on gold and silver could be extreme. While I think gold would show relative strength during that type of economic scenario, I think both metals would be under pressure if the U.S. Dollar started to surge. In fact, if the Dollar really took off to the upside I think both gold and silver could potentially selloff sharply.
As I am keenly aware, anytime I write something negative about gold and silver my inbox fills up with hate mail. However, if my expectations play out there will be some short term pain in the metals, but the selloff may offer the last buying opportunity before gold goes into its final parabolic stage of this bull market. The weekly chart of gold below illustrates the key support levels that may get tested should the Dollar rally.
For quite some time silver has been showing relative weakness to gold. It is important to consider that should the U.S. Dollar rally, silver will likely underperform gold considerably. The weekly chart of silver is illustrated below with key support areas that may get tested should the Dollar rally:
Clearly there is a significant amount of uncertainty surrounding the future of the Eurozone and the Euro currency. While I do not know for sure when the situation in Europe will come to a head, I think the U.S. Dollar will be a great proxy for traders and investors to monitor regarding the ongoing European debacle.
If the Dollar breaks down below the key support level discussed above, gold and silver will likely start the next leg of the precious metals bull market. However, as long as the U.S. Dollar can hold that key level it is quite possible for gold and silver to probe below recent lows.
Both gold and silver have been rallying for quite some time, but the recent pullback is the most severe drawdown so far. It should not be that difficult to surmise that gold and silver may have more downside ahead of them as a function of working off the long term overbought conditions which occurred during the recent precious metals bull market.
Make no mistake, if the Dollar does rally in coming months risk assets will be under significant selling pressure. While the price action will be painful, those prepared and flush with cash will have an amazing buying opportunity in gold, silver, and the mining complex. Right now, risk remains excruciatingly high as the European bureaucrats wag the market’s dog.
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Here's J.W.s Latest Articles
Crude Oil Closes The Week in Overbought Mode
The crude oil market continues to mirror the action in the equity markets. The highs seen on Wednesday in the December contract at $89.69 a barrel remains to be taken out if this market is going to move higher. With mixed Trade Triangles and a Chart Analysis Score of +55, there is no clear cut direction for this market at the moment.
Crude oil is very overbought on the Williams % R indicator. We would not rule out a pullback to the $80 a barrel level, which would represent a 61.8% Fibonacci retracement. Our long term Trade Triangle continues to be negative and we expect it will once again dictate the tone of this market. Intermediate term traders should be on the sidelines and long term traders should continue to be short the crude oil market.
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Saturday, October 22, 2011
Crude Oil Rises On Hopes of Euro Zone Deal
Prices jumped as trading opened in New York and were up as much as 3% in midmorning trade before settling back. Light, sweet crude for December delivery ended the day up $1.33, or 1.6%, to $87.40 a barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange settled 20 cents lower, or 0.2%, to $109.56 a barrel.
Traders and analysts said the market rose on the belief that European leaders will finally put forth a comprehensive settlement to the European credit crunch that has plagued markets on and off for the last year and a half. Government and finance officials were to hold a series of meetings in Brussels this weekend; French President Nicolas Sarkozy and German Chancellor Angela Merkel issued a joint statement saying they would put forth a plan by Wednesday......Read the entire Rigzone article.
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Friday, October 21, 2011
EIA: Libya Resumes Natural Gas Exports to Italy
On October 13, 2011, Libya resumed natural gas exports to Italy via the 340-mile, Greenstream Pipeline (Greenstream), which is jointly owned by the Eni S.p.A. and the National Oil Company of Libya. Natural gas delivery imports to Sicily, Italy, at the Gela receipt point, are now about 150 million cubic feet per day (MMcf/d).
Since February, unrest in Libya resulted in curtailed natural gas exports to Italy. Prior to the February curtailment, Libya supplied Italy with about 900 MMcf/d of natural gas, or 11% of Italy's average daily gas demand in 2010. Italy offset much of the reduced natural gas imports from Libya with increased imports of natural gas from Russia.
After natural gas flows resumed following the disruption, natural gas flowed from the onshore Wafa field about 300 miles southwest of Tripoli to Italy. Natural gas production at Wafa remained open during the crisis and supplied natural gas to Libyan power plants. Most of Greenstream's natural gas usually comes from the offshore Bahr Essalam field (see map); only those volumes from Wafa in excess of domestic consumption are available for export via Greenstream.
Source: U.S. Energy Information Administration, based on Bentek Energy, LLC.
Since February, unrest in Libya resulted in curtailed natural gas exports to Italy. Prior to the February curtailment, Libya supplied Italy with about 900 MMcf/d of natural gas, or 11% of Italy's average daily gas demand in 2010. Italy offset much of the reduced natural gas imports from Libya with increased imports of natural gas from Russia.
After natural gas flows resumed following the disruption, natural gas flowed from the onshore Wafa field about 300 miles southwest of Tripoli to Italy. Natural gas production at Wafa remained open during the crisis and supplied natural gas to Libyan power plants. Most of Greenstream's natural gas usually comes from the offshore Bahr Essalam field (see map); only those volumes from Wafa in excess of domestic consumption are available for export via Greenstream.
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