Crude Poised For a Fall

Jim Brown
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The timing could not have been better. Our first stock and option plays on begin on Monday and the outlook for oil prices suggests a sharp correction. This is the perfect way to start the year.

Crude oil futures rallied as December ended and late Sunday night they were touching the $80 level. If historical trends prevail they could decline as much as $10 over the next week.

The normal stock market reporters are blaming the rise to $80 as due to improving economics in the U.S. and around the world. They pointed to the better than expected Jobless Claims on Thursday as evidence the U.S. economy is improving. I think there is another factor in play.

The Jobless Claims fell to lows not seen since August 2008 because nobody rushed out to file a claim and be forced to look for work during the holidays. I don't think it was specifically because the economy is suddenly doing better. I look for claims to spike sharply over the next 2-3 weeks as seasonal workers are sent home after the holidays.

I believe the rise in oil prices is related more to the decline in crude inventories going into year-end. Refiners don't want to pay property taxes on oil held in inventory on December 31st so they delay incoming shipments until after December 31st. This caused crude oil inventories to decline by 13 million barrels over the last four weeks. I explained more about this in the play description for our first OilSlick position to be entered on Monday. See the plays email for instructions or click on the "Stock Picks" tab on the website late Sunday night.

We do have another cold front headed into the U.S. and the National Weather Service is issuing hard freeze warnings for most of the country. This will increase the consumption of natural gas nationwide and heating oil in the northeast. Natural gas prices declined -13.7 cents last week to $5.572 per MCF despite a 124 BCF draw from storage. If this harshly cold weather continues we can expect even bigger draws but with nat gas supply at record levels I doubt it will push prices much higher.

The dollar is spiking overnight on Sunday and that should also pressure crude prices.

Jim Brown