$100 Resistance Next Target For Crude Oil Bulls

Crude oil closed lower due to profit taking on Wednesday as it consolidated some of the rally off October's low. The mid range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off this month's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 91.15 are needed to confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 20 day moving average crossing at 91.15. Second support is the reaction low crossing at 89.17.

Natural gas was sharply lower on Wednesday as it extends this week's decline below broken trading range support crossing at 3.724. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is today's low crossing at 3.648. Second support is monthly support crossing at 3.225.


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Phil Flynn: Italy Inverts

Crude oil prices are starting to pullback as the situation in Italy goes from bad to worse. The Italy bond yield curve has gone inverted suggesting that the recent Italian Prime Minister Berlusconi show has taken away Italian confidence and could drive the country into a recession. While Berlusconi is promising to go somehow that is not giving the market the same solace that it seemed to yesterday.

Yesterday Iran fears helped drive the market higher but today it is the concern of economic slowing and the fear of contagion. Maybe because the market is not convinced that the bombing of Iran is not going to happen anytime soon. That makes the news on Chinese inflation data sort of a double edge sword. Yes China inflation hit a five month low and that will allow China some slack to stimulate the economy. Yet at the same time the Chinese economy might be slowing reflecting a great European recession .

President Obama 5 year plan for offshore drilling is a five year plan to economic disaster. President Obama trying to provide political cover for his politically motivated drilling moratorium that has cost this nation thousands of good paying jobs and has intensified the impact of the recession across the south is now proposing a five-year plan to open up six areas for oil and gas drilling, including unleased portions of the Gulf of Mexico and along Alaska's coast which they say is a cautious approach that "will help us continue to reduce our dependence on foreign oil and create jobs here at home."

The problem is that it is too little too late. The Interior Department is proposing just 15 potential lease sales in 2012-2017, with five annual lease sales in the western Gulf beginning next fall, and lease sales in the central Gulf starting in spring 2013. according to reports Two of the lease sales will be held in 2014 and 2016 for tracts in the eastern Gulf. Those that are not currently under a congressionally mandated leasing moratorium, set to expire in 2022, and three more sales would be scheduled in "frontier areas" off Alaska's coast, including the Beaufort and Chukchi seas, and the Cook Inlet.

Also the jobs lost because of the resistance to the Keystone pipeline is it any wonder that the President's approval rating is abysmal?

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Cory Mitchell: The Macro Dilemma

When asked to explain two scenarios that could play out in the global energy markets, and what it means for energy investors, here's what Cory Mitchell of CMT said. 


Here's Part 1 of his story..... "The Macro Dilemma"

Energy investors need to be aware there are two massive macro forces in our global markets and economies battling it out.  One is obvious (and positive!), and one is not, it's negative.  But the new global credit crunch has brought this dilemma for energy investors into sharp focus:

1.   Stagnant or declining oil production, which should mean oil prices, and oil stocks, are going higher.

But as I'll show you,

2.   If oil production declines, it will have a negative on global debt and GDP—declining oil production will in turn lead to a long-term decline in the global economy – and a declining economy should push the price of oil down.  The lack of continued growth in oil supply has been a constraint on global growth since 2004, says Canada's Sprott Asset Management.

One scenario points to a higher oil price, and another to a lower price—yet they are two sides of the same coin.  And while it's counter-intuitive, lower oil production can potentially lower oil prices by constraining demand. As these contrasting forces play out now and in to the future, oil markets are likely to remain volatile.

The volatility created by this global battle will present opportunities for energy investors as the macro forces play out.

Economic Relationships with Oil

Oil production (and consumption) drives GDP and debt.  While debt is often viewed negatively, it is what allows our economy to expand.  When a consumer goes to the bank and gets a loan, money is created.

This money is then spent and deposited into someone else’s bank account, allowing the bank to grant another loan and so on.  This is healthy for the economy as long as the process is not taken to extremes and leveraged too highly, like what occurred in the 2008 “credit crisis.”

US debt had been steadily rising but has now plateaued, as shown in Figure 1. The problem is, debt, and thus the economy, do not expand if oil production does not expand.

Figure 1. US Government and Non-Government Debt:

*Source The Oil Drum
 

Figure 2 shows the high correlation of oil production and GDP.  Oil production levelling off corresponds to the flattening in debt (above) and GDP that we are currently seeing.  Oil production levelled off in 2005 and GDP is failing to get above 2008 levels after a significant decline.  The plateaus in oil production, debt and GDP may be short-term, or may indicate a long term lack of growth or decline in global economies.

It's interesting to note that oil production and demand has increased steadily by 10 million barrels of oil per day per decade since 1970—just as the world experienced the largest debt increase in global economic history.

Figure 2 World Oil Production and GDP (Crude Production in blue and scale on the right, GDP in red and scale on the left):
 

*Source: Economagic

Figure 3 shows the high correlation of oil consumption to GDP.  The relationship of oil production to these major economic factors—debt and GDP—are unavoidable.  As goes oil production so goes the global economy.  The major issue presented is that oil production has levelled off.  If oil production cannot increase the world has reached “peak oil” and by extension, peak debt and peak GDP.

This means investors need to look for places which still exhibit growth prospects and may even benefit from peak oil over the next several years to decades.

Figure 3. Oil Consumption vs GDP:





 

*Source: Gail Tverberg,  The Link Between Peak Oil and Peak Debt

Issues the Relationship Presents

“Peak oil” occurs when global productions hits maximum output and can no longer continue to increase, leading to a long-term decline in supply.  Oil is what allows economies to operate, and without it to fuel many projects — well, companies, consumers and banks would have no need for debt.  Debt would dramatically drop, forcing down GDP in the process.

Therefore, peak oil and peak debt will create peak GDP.

When peak oil and peak debt (and by extension peak GDP) will exactly occur is unknown, but global production has levelled off and the idea that we are rapidly approaching a global peak oil production is becoming more prominent in the media. Canada, however, is continuing to see its oil production rise—which is providing a very interesting opportunity for energy investors around the globe.

With debt and oil production levelling off, I believe that at some point the world will hit a “growth ceiling,” until some new technological advance drives us forward once again.  This has happened throughout history, when there have been moments of radical growth following a new technology or an increase in productivity.  Then growth levels off or declines until the next big idea comes along.

That big idea may or not be here yet — shale gas, hydrogen and electricity are some the alternatives currently being explored; though the transition away from oil will take at least 30-50 years according to Vaclav Smil in the book, Energy Transitions: History, Requirements and Prospects.  That's not hard to fathom, given the vast infrastructure aligned with our dependence on oil.  At this time, creating or extracting an alternative fuel and transporting it stills relies on oil.

In conclusion, I see the combination of (at least short term) peak oil and peak debt, which should cause lower demand and lower oil prices, continuing to do battle against the idea that lower oil production should obviously mean higher oil price.

To me, this means the oil sector will continue to be a hot bed of macro volatility and investor opportunity.  And in my next article, I'll explain how energy investors can best profit from the volatility created by these two forces.

- Cory Mitchell, CMT

Commodities Gain Strength on the Back of a Weaker U.S. Dollar

Crude oil closed higher on Tuesday extending the rally off October's low. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are overbought but are neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off this month's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 90.63 are needed to confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 20 day moving average crossing at 90.63. Second support is the reaction low crossing at 89.17.

Natural gas was higher due to short covering on Tuesday as it consolidated some of Monday's decline. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is Monday's low crossing at 3.652. Second support is monthly support crossing at 3.225.

Gold closed higher on Tuesday as it extends the rally off September's low. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that additional strength is possible near term. If December extends the rally off September's low, the 75% retracement level of the 2008-2011 rally crossing at 1826.50 is the next upside target. Closes below the 20 day moving average crossing at 1704.70 would confirm that a short term top has been posted. First resistance is the 75% retracement level of the 2008-2011 rally crossing at 1826.50. Second resistance is the 87% retracement level of the 2008-2011 rally crossing at 1875.10. First support is the 10 day moving average crossing at 1748.30. Second support is the 20 day moving average crossing at 1704.70.


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Crude Oil Rises for a Sixth Day on Iran’s Nuclear Speculation

Crude oil rose a sixth day in New York on speculation Iran’s nuclear plans threaten Middle East stability and an offer to resign by Italy’s Prime Minister Silvio Berlusconi brings Europe closer to solving its debt crisis.

Futures advanced as much as 0.5 percent, matching the longest run of gains since the six days ended Nov. 8, 2010. The U.S. may pursue additional sanctions against Iran following release of a United Nations report that concludes the Islamic Republic was working to develop a nuclear weapon, according to two U.S. officials. Fuel stockpiles fell last week, the American Petroleum Institute said yesterday.

“This current supply shock potential that the markets are looking at with Iran has pushed the price well above our outlook,” said David Lennox, a resource analyst at Fat Prophets in Sydney, who had forecast oil to trade from $80 to $90 a barrel. “The situation in Europe will still take some time for the corrective activities to flow through to the real economy”.....Read the entire Bloomberg article.


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Phil Flynn: Old Risks Return

Something old something new something bullish and something blue. The bulls have wrestled control of the petroleum markets with a slew of bullish news and some strong technical formations driving oil to a three month high. With the market focused on the bailout of Europe the risk to supply is increasing as tension between Israel and Iran are heating up. In fact for oil the situation with Iran and the violence in Nigeria and Syria may be a better reason to be long than the European charades. European finance chiefs continue to work on details increase the European Financial Stability Facility by$1.4 trillion.

Oh sure we know the new economic maxim that bailouts are bullish yet as the market awaits the fate of Italian Prime Minister Berlusconi and who the New leader of Greece is going to be it may be the fate of Iran that may present more risk. Debate is raging in Israel on whether they should attack Iran as the regime once again lied to the world about their nuclear intentions. According to Intelligence provided to U.N. nuclear officials Iran has mastered the critical steps needed to build a nuclear weapon. Israel feels that they may be the target and the risk of a conflict is being priced into oil.

Nigeria continues to be a risk as well recent violence by Islamic fundamentalists is putting supply at risk. Reuters' news reports that " Nigeria's national security adviser on Monday dismissed a weekend warning from the United States of an Islamits bomb threat to luxury hotels in the capital as "not news," and said it was spreading unnecessary panic. The attacks were the deadliest since Islamist sect Boko Haram launched an insurgency against the government in 2009. The group claimed responsibility for the violence that left bodies littering the streets and police stations in ruins.

Witnesses reported gunfire in the city again on Monday, but military sources said it was from guards at the Yobe state governor's house firing at a suspicious speeding car, and gave no further details."The (U.S. statement) is eliciting unhealthy public anxiety and generating avoidable tension," said Owoeye Andrew Azazi, Nigeria's national security adviser. "The ... government wants to advise members of the public that it (will) continue to ensure security of lives and property under its jurisdiction."


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How Cheap is Natural Gas?

How cheap is natural gas? The EIA tells us winter (November-March) natural gas futures prices are near their lowest levels since 2001-2002.

The average natural gas futures price for the upcoming winter is less than $4 per million British thermal units, the lowest level entering the winter since 2001-2002. The so called "winter strip," the average natural gas futures price for the contract months November through March as settled on the New York Mercantile Exchange is a closely followed measure of market participants' price expectations.

In markets such as New England and California, where natural gas prices often set on peak, wholesale power prices, the NYMEX winter strip for natural gas also can influence expectations for forward wholesale power prices.

Source: U.S. Energy Information Administration, based on Bloomberg, L.P.
Note: October 20 was selected because it represents a date near the start of the natural gas winter heating season yet still has information for five months of the upcoming winter's natural gas NYMEX future's strip.


These prices do not reflect expectations for the cost of transporting natural gas from Henry Hub to downstream market locations. The Henry Hub, in Erath, Louisiana, is the physical delivery location for the NYMEX natural gas futures contract. Sabine Pipeline is the operator of the Henry Hub. 

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Crude Oil Bulls Take Solid Near Term Advantage

Crude oil closed up $1.25 a barrel at $95.51 today. Prices closed nearer the session high and hit a fresh three month high today. Crude bulls have the solid overall near term technical advantage and gained more upside momentum today. Prices are in a five week old uptrend on the daily bar chart.

Natural gas closed down 8.6 cents at $3.697 today. Prices closed nearer the session low today and scored another fresh contract low. The bears have the solid overall near term technical advantage.

December gold futures closed up $35.90 an ounce at $1,792.10 today. Prices closed near the session high today and hit another fresh six week high. Strong safe haven buying interest was seen amid the EU turmoil that is now focusing on Italy. Bulls have solid the overall near term technical advantage and gained more upside technical momentum today.


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Phil Flynn: Will He Stay Or Will He Go

No Not Papandreou he was so over the weekend. No the question is all about Italian Prime Minister Silvio Berlusconi.

While Greece has a new coalition government in place now the focus is on Italy and whether Italian Prime Minister Silvio Berlusconi will resign and open up the gridlock that has slowed the reforms that are needed to keep Italy of becoming more like Greece.

The markets have a lack of confidence in Berlusconi after many broken promises on reform and rallied on the prospect that Berlusconi was gone. For oil it is headline to headline.
We will be looking to play ranges!


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How to Trade This Headline Driven Stock Market

With all eyes on the unemployment report and Europe, the CME Group’s PR Department nearly created an all out panic with their announcement after the market close on Friday relating to futures maintenance margin. The original statement was vague and I was quite concerned until I checked out the CME Group’s web page and the PR Department sent an update clarifying their position. At this point I think the crisis has been averted, but this is just another reminder that we live in “interesting times.”

Keep in mind that if the CME starts raising margin rates across the board for futures contracts in order to protect themselves stocks and commodities could collapse. Silver recently has is margin rates increased and silver since then dropped 25% in value. So imagine if they raised the rates for more commodities…

The current price action in the marketplace pales in comparison to the world’s geopolitical tensions and deteriorating social mood. 

In my trading career, I have never seen the price action in the indices react so violently to intraday headlines and rumors. Risk is high and the types of traders profiting from this market are day traders and very short term traders with trades lasting just a couple hours to 24 hours in length. Aggressive trading which small position sizes is all that can be done right now. This is not meant to be investment advice, but more as a function of the market environment in which we find ourselves currently trading within.

Right now it is hard to say where price action in the broader indices heads in the short run.  One headline out of Greece or Italy could dramatically alter economic history. In the intermediate term I remain neutral to bearish for a number of reasons. One indicator I follow is the bullish percent index on the S&P 500 which at this point is arguing for lower prices.

The chart below illustrates the S&P 500 Bullish Percent Index:

As can be seen above, the S&P 500 Bullish Percent Index is presently at an overbought status. When looking at the relative strength and full stochastics indicators one would argue that a pullback is warranted. Historically when the S&P 500 Bullish Percent Index is this overbought, a pullback ensues which ultimately sees the S&P 500 Index selloff. The more arduous task is trying to determine just how deep the pullback on the S&P 500 Index might be.

It is critical to point out that while I do believe a pullback is likely, I will not rule out a rally into the holiday season. Much of the near term price action is going to be dictated by headlines coming out of Greece and the rest of Europe. In addition to Greece, Italy is also starting to see increased concern regarding an unsustainable fiscal condition. Depending on how the European Union handles the varying degrees of risk in the near term, we could see price action react violently in either direction.

With the market capable of moving in either direction, I wanted to point out some key price levels which should act as clues regarding potential future price action in the S&P 500. The two key support levels to monitor on the S&P 500 Index are the 1,240 and 1,220 price levels.

The daily chart of the S&P 500 Index below illustrates the price levels:

For bullish traders and investors the key price level to monitor is the recent highs on the S&P 500 around the 1,290 area. The weekly chart below demonstrates why this price level is critical and which overhead levels will offer additional resistance should the recent highs be taken out to the upside.

SP500 Weekly Chart Analysis:

While I am neutral in the intermediate to longer term presently, in the short run I have to lean slightly bearish simply because of the future headline risk and also because a major head and shoulders pattern has been carved out on the hourly chart of the S&P 500 Index. This type of chart pattern is synonymous with bearish price action.

The hourly chart of the S&P 500 Index is shown below:

Right now I remain slightly bearish, but should the head and shoulders pattern fail and/or we begin to see multiple positive reactions to news coming out of Europe a strong rally into the holiday season is likely. Unfortunately all we can do is monitor the key price levels and wait patiently for Mr. Market to tip his hand.

Until we see a breakout in either direction, we could see price action inhabit the 1,220 – 1,290 price range for several weeks before we get any more clarity of future direction. Until I see a breakout, I will remain relatively neutral with a slight short term bias to the downside based on price patterns in the shorter term time frames. This is a tough market to trade in, and I don’t want to get chopped around or do any heavy lifting. I’m going to focus my attention on high probability, low risk trade setups until directional biased trades make more sense.

In closing, I will leave you with the thoughtful muse of the late Texas Congresswoman Barbara Jordan,

“For all of its uncertainty, we cannot flee the future.”

Market Analysis and Thoughts By:

Chris Vermeulen – ETF Trading Videos & Trade Alerts

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