Record cold weather and an improved global outlook along with dollar weakness and the re-emergence of geo-politcal risk in Iran all came together last week to send crude oil prices soaring to 14-month highs. Oil prices on the NYMEX surged passed the 2009 high at $81.99 to reach a high at $83.52 before closing at 82.75 with a gain of 4.3% on the week. A dismal employment report capped gains for the week with the unemployment rate standing at 10%, reminding us of the looming recession.
The cold snap was the main driving force behind rising crude prices as traders anticipate a boost in fuel demand. The U.S. National Weather forecasts below normal temperatures through Jan. 17 for the eastern half of the U.S which consumes roughly four-fifths of heating oil supplies in the U.S. According to Accuweather, the eastern half is facing the coldest winter since 1982.
The weekly inventory report was bearish last week but had little impact on the market as it was outweighed by a weak dollar. The DOE reported crude stocks rose 1.33 million barrels while estimates called for a decline of 1 million barrels. Supplies of distillates slipped just 233k vs. estimates of a 1.85 million barrel drop. Gasoline inventories climbed 3.74 million barrels vs. an 800k expected gain. Fuel consumption for the week ended Jan 1 declined 1.6 percent. All in all, the report reiterated the bleak demand situation.
Moving forward, the market will likely be sensitive to weather forecasts this week as any signs of thawing will put downward pressure on prices. The weekly inventories will play a key role as the Bulls will be looking for confirmation to sustain rising prices.
Technical Outlook
The market began this week above both 5 and 3 week uptrend channels crossing at $82.20 and $81.50 respectively and surged to a new high for 2010 at 83.95. The Bulls failed to sustain rallies with trade violating both trends at the time of this writing, indicating a price correction is unfolding. Producing settlements below $81.50 will set a strong sell rallies bias against 81.50 to 83.00 for the week while targeting the 80.00 to 79.00 range with the 2009 settlement price at 79.36. A drop below $79.00 shifts the market into negative territory on the year and opens the flood gates for a flush to new 3 and 5 Quarterly uptrend lines crossing at $77.75 to 77.00 where price action should stabilize for the week though allow for slippage to 76.00.
On the buy side this week, the first move into the $80.00 to 79.00 range can be scaled into as trade holding the 80.00 mark could easily snap prices back to 81.50-83.00 Multiple settlements back above $83.00, which would place trade well above the broken 5-week uptrend line, will reverse price action to the Bulls to retest the 2010 highs at 83.95 while bringing 85.00 to 85.50 into range for later in the week. With the top of the 3-week uptrend channel crossing at $85.50, cover long as rallies are expected to be capped around the 85.00-85.50 range. The first test of $85.00 appears to offer a solid low risk short play with a suggested Stop placed above 85.50 and a potential reversal target at the 82.00 to 80.00 range. If the Bulls can post settlement above $85.00 on the week, we’ll be looking at a significant extension to 88.00 to 90.00 next week.