The oil market exhibited weakness once again at the crucial $80.00 to 80.50 resistance barrier resulting in a sharp turnover late last week with overall action remaining range bound for more than a month. Oil has been trading between $75.00 and 80.00 since late October. The spot December contract which expired on Friday settled at $76.72 with a marginal gain of 37 cents on the week. The January contract, which takes the spot position this week, settled at $77.47 on the week.
Prices rallied early last week, bolstered by record high gold prices, a soaring stock market, the battered dollar, and higher-than-expected draws in inventories. The price of gold rocketed for the 3rd straight week to a record $1153.40. The S&P hit a yearly high at 1112.10 while the Dow traded to 10438. The dollar hit fresh 15-month lows which prompted the early rise in oil last week. The weekly inventory report showed a decline in crude stockpiles of 900,000 barrels while analysts expected to see a modest build.
Despite the bullish drivers, the market is struggling to sustain rising prices. The main reason is the fundamental reality is finally setting in. In an economy that is supposedly recovering, demand remains weak and inventories remain high. Refiners are operating below 80% at 79.4%, indicating the weakness in demand. The five-year average for the second week of November is 87.9 percent of capacity. Inventories at Cushing, the delivery point for NYMEX futures, rose 4.8% to 28.3 million. With stocks of crude oil, gasoline, and distillates all remaining above average, the market remains in a fundamentally bearish environment and becoming increasingly susceptible to a sharp correction as we close in on 2010.
TECHNICAL OUTLOOK
From a technical standpoint, the market is in a 6-week downtrend since peaking at $82.00 in October. The trend line has been capping advances in the last 4-weeks in the $80.00 to 81.06 range, setting a bearish technical picture on price action below $80.00. We’ll maintain a ‘sell rallies’ approach this week until the market closes above $80.50, the highest weekly spot settlement for oil this year. The 11-month uptrend line for December is in play this week, providing a support target at $77.00 to 76.65 with a minor 3-week uptrend line intersecting this range as well. Trade taking out $76.65 this week will reinforce bearishness to retest the November spot low at $75.50, which marks a 38% retracement of the $65.00 to 82.00 uptrend, down to the 4th Quarter breakout at $75.00. The 6-month uptrend line for December also crosses at the $75.00 level, making a break below there even more significant. That being said, trade or settlements below $75.00 will set the next key downside objective at $73.00 down to 70.00 in the coming weeks.
On the upside, if the Bulls can successfully fend off sellers against the $77.00 to 76.65 trend line Support base, cover shorts as price action will remain range bound and likely bounce back to the $79.00 to 80.00 range. Daily settlements above $80.00, or a breakout this week above 80.50, will have bullish implications to at least challenge the November spot high at $81.06 up to the 2009 spot high at $82.00. A secondary breakout move above $82.00 shows room to 83.00 at a minimum and as high as $85.00, the top of the current 5-month uptrend channel while setting up a potentially bullish scenario for December.
