Crude oil prices fell to a low of $68.59 overnight on Sunday after OPEC members again talked to the press about not changing production numbers at next week's meeting. This is old news but it is being blamed for the drop. I believe the fault lies elsewhere.
The dollar was falling overnight on Sunday after Abu Dhabi announced it would loan Dubai $10 billion on Monday to prevent a default of Dubai World. The dollar was falling, S&P futures rising and crude prices appeared to have found a bottom. I say appeared because the news rebound back to $69.79 quickly faded and prices are nearing $69 once again.
As I wrote in the Option Investor market commentary this weekend I believe the drop in crude prices is related to the rising inventories in storage at Cushing Oklahoma. That is the delivery point for light crude referenced by the crude futures. Without going through the entire description again suffice to say that Cushing is running out of places to store oil and owners of January production are becoming frantic to lay that position off on somebody else and avoid having to pay higher fees to store it elsewhere until it can be delivered to Cushing.
The expiration for January futures is next Monday, December 21st. We are likely to see the most volatility on the Thr/Fri before the expiration.
The February contract has declined with the fall in the January prices but still remains over $71.50 because of the lack of delivery pressure. I view the $70 level on the February contract as a support point worth buying.
I would expect some more declines in the January futures now that $70 on the January contract has been soundly broken. $67 would be my next support target. However, I would be very careful about going long anything in the oil sector until after next Monday's close.
We also have the stronger dollar pushing oil prices lower. The dollar rallied to a six-week high on Friday and though it has declined slightly on the Dubai news it is not going down without a fight. Strong dollar, weak oil, be patient. Next week the picture should look a lot different.
The IEA reported on Friday that expectations for oil demand rose for 2010. Not much but enough to tease energy traders into planning to get long before the Q2/Q3 demand increase. Remember, the EIA, IEA and OPEC release these short term reports monthly and once the trend is clearly seen as moving higher then the fun will begin. The IEA and EIA both mentioned the lack of a demand rebound in the USA. Since we are the largest consumer it stands to reason there will not be a large increase in demand until our economy improves.
Actually it should not happen until our labor market improves. Having over 15 million people out of work and not able to afford gas even if they wanted to drive somewhere is a major drag on demand. This is why gasoline demand in the U.S. is at decade lows. It was not the cash for clunkers taking a lot of gas guzzlers off the roads. Automakers will still sell over 10 million new cars in the U.S. this year and we will only crush 2 million. A net increase of 8 million cars, even if they are fuel efficient, is still a large increase. Our demand will come back once jobs come back.
Oil prices are also volatile because of the uneven rebound in other global economies. China saw a 19.2% growth in industrial production in November but Japan's Tankan index on Monday posted the smallest improvement so far this year. The U.S. will release its Industrial Production for November on Monday and analysts believe it will show the fifth consecutive monthly gain. This will help the dollar's strength and could both help and hurt oil prices. Help because the U.S. is growing but hurt because of the stronger dollar.
The December FOMC meeting on Tue/Wed is also a pothole ahead for oil prices. What the Fed says on Wednesday afternoon will impact prices because their comments and actions will impact oil demand. Not now but in the future and traders will try to price in those expectations.
The CFTC trading report showed that speculative "net long" positions in crude fell by -11% to 67,817 contracts for the week ended Dec-8th.