For the oil bulls it was just one of those days. Bad earnings from Alcoa set the stage for a weak commodity trade. Oil just could not get over the fact that the Chinese government told the Chinese banks that they would have to raise their reserve requirements, essentially taking back liquidity from the Chinese growth machine. When oil bulls try to justify the global glut of global supply, it is the growth in China mantra that they repeat over and over. That droning murmur may soften a bit as China seems to be ready to let some air out of its expanding bubble. This week's data that showed China's Imports hit a record high seemed to be a signal to the Chinese governments that they have to start putting on the breaks before inflation starts spinning out of control.
As bearish as that was it only played a part in the larger commodity melt down. Precious and industrial metals took it on the chin and a stunningly bearish crop report especially in corn helped seal the markets fate. Even the Short Term Energy Outlook released by the Department of Energy seemed to play into the bearish market mood when they lowered their US demand expectations. Yet the most bearish thing oil saw was after the close with the release of the API (American Petroleum Institute) report.
You can forget all about that cold weather stuff and all the demand that it was supposed to bring because after the API report, it was like it never happened. The API reported that distillate supplies actually increased by a whopping 3.60 million. That was not supposed to happen as global cooling was supposed to zap supply. That was a mere bag of shells when you compare it a 6.82 million barrel build in gasoline supply. A number so stunning that despite predictions by The Department of Energy it is possible that we won't see $3.00 gasoline after all! Now top that off with a 1.2 million barrel in crude supply and you have got a total bearish smack down.
What the heck is going on at the API? Will the DOE come close to confirming this week's bear town blitz? Is it possible that imports that had been stymied by weather down in the gulf region are finally hitting our shores? The answer in part is yes. Refinery runs did increase to 79.8 percent from 79.5% but that is not exactly increase that would normally lead to this surge of supply. The API showed that crude imports surged. The API reported that crude imports leapt to 9.729 million barrels per day from 8734 million barrels a day. Yet at the same time they say that product imports fell which would not add up unless demand was really bad.
Another sign that oil was at a top is when Kuwait's oil minister, Sheikh Ahmad al-Abdullah said that the price of oil is "fantastic". Anything that "fantastic" can't last.
Oil is in the process of putting in a long term complex top. The problem is that it may take many months for it to complete. It seems like the market is in to more complex trading ranges with an upper band and a lower band and it seems to be on a longer term journey to at some point test the $85 a barrel area. Yet every time if fails, it seems to push us back in a lower range in the $70 a barrel area. If we close below $80 today, it will put us in the lower range and we could see oil get as low as $70. If we closed above $80 the market will try perhaps in vain to test what the bulls feel is it's $85 a barrel destiny. In other words range trading will still be in our future it is just a question of whether it will be in the upper range or lower range. Long term I feel this market will head lower with a longer term test into the lower $40s. Yet we have to play the ranges until every last bull realizes that, it is unlikely we can go above $85. If you have the patience and the confidence you can sell a rally and risk a close above $85 for a long term move to $44 but in the meantime get ready for a long and bumpy ride. Of course when the market finishes its topsy turvy gyrations, get ready for it to break quick. In the meantime you might as well sit back and enjoy the range!
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Republished with permission from Alaron's Energy Report Daily.