Futures Expire With A Whimper Despite Equity Market Decline

Jim Brown
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Crude futures for February expired quietly at the close of trading on Wednesday after trading in more than a $2 range over the prior 24 hours. The February contract traded from a low of $76.76 to a high of $79.15 and back to settle at $77.62 on Wednesday. The March contract started out its front month status at $77.57.

Despite the crash in the equity markets the crude futures were rather tame despite the wide range. There were no sudden moves and the contract expired quietly. The March contract started off with the overnight session with a +63 cent gain to $78.20 but the rising dollar overnight killed the rebound.

The decline on Wednesday was helped by new from China that banks had been told to stop writing new loans until the end of January. Loan volume was four times the target rate and on pace to surpass 30 trillion Yuan. In all of 2009 they only loaned 9.59 trillion Yuan. In the first two weeks of January banks loaned 1.1 trillion Yuan in new loans. This is exploding the cost of real estate and China is afraid it will produce a bubble similar to the USA.

Stopping loans for two weeks really should not have any impact on the energy sector but the price of oil declined with the market on the China news. I am sure expiration was also impacting prices.

Two different analysts made market calls on oil prices on Wednesday. Once from Australia said $80 oil was a sure thing after technical support in the mid $70 had proven so strong. He said as long as support at $75 holds we could see $80 within a week. Because of the longer term constructive up trend he believes oil will trade between $88 and $100 this year. Goldman Sachs also voiced an opinion on oil on Wednesday saying it would spike over $100 but not until 2011.

The other analyst suggested oil will trade down to $71 because resistance was solid at $84 and support at $80 failed. He believes inventories will rise due to planned refinery outages for winter maintenance and continued weak demand. He also believes the recent rally was overdone and fueled by year-end cash. I wonder if he read my comments over the last couple of weeks?

I believe inventories will rise on the EIA report on Thursday BUT the API report Wednesday night showed a decline of 1.8 million barrels and exactly the opposite of analyst expectations. Crude levels should rise over the next three weeks.

On a side note the tanker that was released by Somali pirates earlier this week contains two million barrels of oil destined for the USA. It was captured on November 29th with four weeks left on its trip to the LOOP terminal in the Gulf of Mexico.

OPEC left their 2010 predictions for demand unchanged in their January report but warned that seasonal factors could cause prices to drop in the coming months. OPEC also said the recent rally was not caused by the recent cold snap but was likely caused by year-end investment into commodity funds. Seems to be a common theme developing here.

The OPEC report predicted oil demand would rise to 85.1 mbpd in 2010. That is an increase of +820,000 bpd over 2009. The IEA predicted last week that demand would rise +1.44 mbpd in 2010. That was a slightly lower number than the prior month.

Based on secondary sources OPEC compliance with its production cuts has fallen to 56%.

Another factor pushing oil prices lower is the stronger dollar after the Scott Brown election. Some analysts believe this is the beginning of the end of monster deficits and the 41st vote will prevent hundreds of billions in new spending in 2010. A more responsible government with smaller deficits will cause the dollar to strengthen. Of course this is all guesswork and wishful thinking today and it will probably fade once the election news blows over. Until it does fade the rising dollar will push crude prices lower.

Jim Brown