Concensus Report: July 16th, 2009

Crude Oil rebounds back up to challenge the $62 level on technical concerns and a weaker dollar despite the EIA report, while Natural Gas stages dramatic short-covering rally from technical lows.

Natural Gas and Oil

Technical Outlook: Since our last report, I said looking ahead, technical indicators had now resulted in a massive attraction of new shorts that traditionally precedes a sharp and dramatic bullish reversal. I also said if you follow the past price pattern of this market and when you add to this the quickly dissolving profit potential of the short-side when considering the continuation chart low at $3.26 was now within reach, in contrast with the growing risk of violent short-covering as the immense potential for gains on the rally looms larger, that looking ahead this technical scenario gave me high confidence in the final attempt to test the year’s lows would transpire within the next 3-5 sessions, if the existing lows were not already in place. I then stated after which I anticipated the market would then have completed a short term correction and trigger a dramatic bullish reversal, which exactly what took place, and within my time cycle. The market not only tested the low of $3.26 but briefly exceeded it intraday to a new low at $3.22 before closing at the previous low. Today the market performed a key bullish reversal and also an outside day up taking out the previous day’s low before closing at a new high on the week, after an impressive gain of $38.5 cents to close at $3.66 basis August spot on the fifth day of my 3-5 day timing cycle confirming last week’s report. Looking ahead most technical indicators are now positive with stochastics, the MACD, relative strength and momentum suggesting further upside ahead and I feel the market will now confirm the bull reversal by continuing higher over the near term to challenge previous over-head resistance at $3.80 to $3.92 which will only set the stage for a more critical test at $4.10 to complete my previous outlook.

Fundamental Supply Update

This week's EIA report showed an injection of 90 bcfs, which was in line with estimates by Dow Jones and Bloomberg that ran close to the same respectively. Storage now stands at 2886 bcfs, which is 589bcfs higher than last year at this time and 454 above the five-year average or 18.7% over 2432. Following the EIA update the market completed a rather volatile session that saw values trade is low as $3.25 prior to the news and then suddenly rise to as high as $3.68 before settling near to the highs of the range at $3.66 at the close of the session for a strong gain of $.38 on the day. The markets Rally following the EIA update was more a result of selling the rumor in buying the fact as a bearish number had already been priced in, so when the number came in as neutral shorts that little room left to maneuver except to cover some new doubt very profitable positions considering the market recently staged the most dramatic decline of the year within three weeks. This scramble by the shorts to exit the market obviously attracted some short-term Bulls to enter the fray with some buying of their own which only exacerbated the volatility to the upside. As I stated in last week’s report the market was now both technically and fundamentally in-line and grossly oversold making traders extremely vulnerable and on a hair trigger to initiate buying upon the discovery of even a hint of anything bullish. Obviously the EIA data provided the trigger, however, the stock market recovery this week along with the rebound in crude oil against a backdrop of the weaker US dollar, all combined to also support today’s impressive and yet isolated rally as the crude oil price move proved to be mild in comparison.

Concerning Crude Oil, today the market closed positive with a modest gain of $.51 or 0.8% to settle at $62.05 basis the August contract on the Nymex. Petroleum values no doubt found strength from positive economic data emanating from both the US and China being the largest two Energy consumers in the world. China’s second-quarter GDP rose by more than expected 7.9% in the strong increase over the first quarter’s 6.1% which was lifted the 7.1% keeping the nation on track for growth a rate of 8% for 2009. The US jobs data showed initial claims had dropped by 47,000 to 522,000 for the week ending July 11 and lowest level since early January, however, when you take out the Labor Department’s seasonal adjustments continuing claims actually climbed by 86,000 to 668000 which only proves trying to find bullish justification for higher energy prices within the employment sector requires a strong bias and the usage of selective focus in my opinion along with a high degree of denial and a willingness to ignore the bigger picture. However, the market is never wrong and if the players involved choose to ignore certain undeniable facts such as the fact that real demand for the petroleum products fell to the lowest level in over a decade while simultaneously inventories have reached the highest level in 11 years, then the market will temporarily focus on such immediate concerns as today’s stock market rally which suffers from a strong dose of denial itself in my opinion, and yet higher prices materialized. However, as I have stated before and even forecasted this anticipated price reaction as I stated in last week’s report that rebound attempts should be contained by overhead resistance at $62.50 and then more critically above this at $64 based on the current technical and fundamental outlook, it’s still only delays the inevitable as the underlying real fundamentals will ultimately impact values. When this reckoning takes place crude oil and the entire petroleum complex should resume its downward track with my near-term target at $56 still in progress and lower prices could easily follow this objective. The July 13 low of $58.32 basis August spot will soon be eclipsed in my opinion and yet has already confirmed my Wall Street Journal interview on June the eighth calling for a dramatic price drop after the market tops out at $72.50 which remains pennies within the market’s highest close.

Conclusion

Natural gas closed with a substantial short-term jump of $.21 to settle at $3.76 basis the new spot September futures, however this was more of a knee-jerk rebound following yesterday’s brief flirt with weekly lows as expiration related selling took the market down $.16 cents as contracts changed hands. Looking ahead with technical signals mixed and continued weakening industrial demand I expect price action to remain subdued with lower basing action as values increase short participation until the profit potential diminishes to the point at which they must cover their positions attracting buyers returning the market up to previous key resistance levels. This continued volatile price pattern should keep values range bound between $3.35-$3.46 on the buy side up to $3.80 -- $3.92 on the sell side until the fundamental picture changes by way of the economy or the weather or both.

Concerning crude oil after today’s substantial recovery the market continues to maintain its upward bias in sympathy with an overinflated stock market that also suffers its own form of reality denial. However values have managed to stay between the price points that I have outlined since early June with the ceiling above at $72.50 remaining intact and $58 holding support on the bottom. Last week might call for resistance at $70 likely to send a market that to test the $60 benchmark saw values decline all the way down to $62 before the sharp recovery today that had little substance behind it other than the blind optimists that are cheering along Wall Street in claiming a very precarious and presumptuous and to the recession quickly followed by economic recovery that also lacks justification. Crude oil which is blindly following the cheerleading squad that is claiming the premature economic salvation is even further detached from reality as supply levels approach 19 year highs here in the US, global demand continues to subside, and OPEC production reserves are at the highest levels since March 2003 before the Iraq war began! Despite the flimsy support of the recent weakness in the US dollar, at the next critical trigger point whether that be a stockmarket correction, an upward fluctuation in the dollar, another sizable increase in supply or commensurately noticeable drop in demand, and the market could easily yield a vicious selling avalanche as traders liquidate layers of long positions that are vulnerable to the sobering arrival of excepting the existing facts and relinquishing their current obsession with the speculative Mirage of future economic growth yet to materialize.

FUTURES AND OPTIONS TRADING INVOLVE RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE.

July 16th, 2009

United Strategic Investors Group

Guy Gleichmann, President

2641 E. Atlantic Blvd. Suite 208
Pompano Bch. Fl. 33062

Back to top