Weekly Oil & Energy Insider Report
OIL & ENERGY INSIDER - Investment Opportunities & Strategic Energy Intelligence
29th April 2016

Bears Versus Bulls, Can This Rally Hold?

In this issue

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Inside Investor
Hold Out On Those Long Term Stock Picks
Inside Opportunities
How To Play The Oil Majors In 2016
Executive Report
Refining Margins Improve As Oil Hits $45
Inside Intelligence
Global Energy Advisory - 29th April 2016
Inside Markets
Bears Versus Bulls, Can This Rally Hold?
Inside Investor with Dan Dicker

Hold Out On Those Long Term Stock Picks

The chorus has become deafening:  The International Energy Agency (IEA) has predicted a full ‘rebalancing’ of the oil market by late 2017, with OPEC joining in on that timetable Thursday.  Our own Energy Information Agency (EIA) has gone even more aggressive, expecting a cross of the global supply/demand lines later this year and agreeing with the timeline that I laid out in my book more than a year ago.  

The markets, as always an ‘anticipatory’ instrument, are responding by ratcheting up the prices of oil stocks, sometimes to levels that corresponded to oil trading more than $15 higher than current levels:  EOG Resources (EOG) is near $80, Devon (DVN) at $35, Hess (HES) above $60 – all prices seen in late November/early December of 2015, when oil was hovering nearer to $60 a barrel.  

As happy as I could be to see (some perhaps) premature profits on many of my long-term oil positions, I’m also wary:  It is entirely clear to me that our oil stocks are getting out too far on their skis too soon, and even though I believe that oil could easily run towards $50 a barrel without taking a break, I don’t believe the oil stocks should or will react more positively to an even more extended $5 a barrel rally.  

Some analysts are seeing it similarly, even if they were late to this ‘energy renaissance’ ‘sector rollover’ ‘short covering’ party – or whatever name you’d like to put on it.  Deutsche Bank, for example, has recently downgraded EOG, citing simply that at this point in the cycle, there were better values to be had.  

I have to agree.

When the oil market was completely on the skids, making new lows under $30 and testing our resolve to continue to average into oil stocks, we did what our brains and insight told us to do – find the best quality shale players that were unimpeachable even through a year or more of prices below $40.  That’s where we found EOG and Chevron (CVX) and Cimarex (XEC).  We mostly ignored anything but the best – those mostly solid E+P’s that had warts on the balance sheet or excess exposure to natural gas or a suspicion of a dividend cut or bond downgrade were shunned. It is precisely these names that have delivered even juicier returns in the sector rally we’ve seen:  Devon, from a low of under $20 is now near $35, Apache (APA) has gone from near $35 to $55, Continental (CLR) has moved from $20 to near $40 (!) and there’s our beloved Hess.  

These are the stocks we must center on now.

Our long-term plays are in place – or should be – and should remain untouched.  The next drift down in oil stocks should not be used to add again to those, but instead used to add a little more beta on the ones that are clearly now far, far too ahead of themselves not to take another significant dip down.  

So even if they’re not the strongest players in the game, I’m going to key on those – many of which I’ve mentioned to you to keep an eye on and several we’ve traded successfully already:  Pioneer Natural Resources (PXD), Continental, Devon and Hess.  

A huge overhang of stockpiles still limits the upside in oil. This year’s million barrel a day drop in U.S. onshore production will be offset by still increasing production in the Gulf of Mexico.  Iran remains the wildcard in OPEC supplies and Saudi Arabia is threatening another 1.5m barrels a day of production (even if I think they can’t manage it).  In short, I think there is little chance that oil, and oil stocks, won’t take another move downward – and a significant one.  

Be ready for it – and buy some of our “B-players”.  They’re poised to deliver some outstanding mid-term profits.  

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Inside Opportunities with Martin Tillier

How To Play The Oil Majors In 2016

This week saw the first of the major multinational, diversified energy companies reporting earnings for the first calendar quarter of 2016. As expected, they have not been pretty in year on year terms, but, as I suggested last week may be the case, most have beaten the drastically cut analysts’ estimates for the quarter. BP (BP), Total S.A. (TOT), ConocoPhillips (COP) and ExxonMobil (XOM) all had better than expected quarters, with only Chevron (CVX) missing.

Of course that doesn’t mean that everything in the garden is rosy. Most expressed caution, and even worry, about the rest of this year and, while beating expectations is obviously a good thing, all reported huge declines in both EPS and revenue from last year. It is interesting, though, that despite Q1 covering the period when WTI dropped as low as $26.05, only Chevron and Conoco actually reported a loss for the quarter. This indicates the benefits of integrated operations, where the steady cash flow from midstream and downstream business offset the losses from E&P when prices are low. 

That is not the only bright spot either. Gloomy forecasts are the only way that CEOs of these companies can go given what has transpired over the last year or so, and reports of cutbacks in capital expenditure, layoffs and other cost saving measures have been the order of the day. In the darkness, however, there were signs of light. Total in particular hinted that they may be looking at improvement as the year progresses. They said in their report that they foresaw a 4 percent increase in production overall for 2016. 

For investors this is significant in two ways. Firstly it indicates that Total’s production cuts came before oil hit what is increasingly looking like the bottom in February and that they are now beginning to step up into a rising market. Secondly, as OPEC talks of a freeze and the U.S., where Total has a smaller presence than most is still cutting back, it becomes clearer that Total’s maintenance of relationships in Iran, where production is ramping up, is beginning to pay dividends. That, and the fact that TOT saw one of the lowest year on year EPS declines at only around 40 percent suggests that they may be the best of the bunch for long term investors.

For those with a shorter time frame and more of a trader’s mindset there is still one opportunity to buy in front of earnings looking for a good result and a quick pop in price. Royal Dutch Shell (RDS.A) will release their earnings early on Wednesday and, based on what we have seen so far, look like a decent buy in front of the numbers. 

In general the European based companies have seen less drastic declines that their American counterparts and those with larger downstream operations have understandably fared better. Shell fits the bill in both cases so even though the stock has reacted positively to other earnings and is up around 50 percent from February’s lows, their filing could still be good enough to reward those who buy early next week. 

To sum up then, what we have learned from big oil companies’ earnings so far is that things aren’t as bad as they could have been. They have weathered the storm of oil in the $20s and most are still making money. Even more importantly in the eyes of many, dividends have remained intact. As Charles Kennedy reported on Oilprice.com earlier this week many people feel that that is unsustainable, but for the short term or swing trader with a few months’ perspective, long big oil is still a good position.
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Executive Report with ISA Intel

Refining Margins Improve As Oil Hits $45

Friday, April 29, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers. 

Let’s take a look.

1.    Gasoline refining margins improve

-    Downstream units at many integrated oil companies have been the lone bright spot for much of the down market since mid-2014, with very high margins for much of 2015. However, the margins for refineries – which buy crude and process it into gasoline, diesel, and other products – collapsed late last year. 
-    Only recently have refining margins improved, as evident in the Reuters chart above. There are not clear cut answers for why margins are improving, but generally speaking, they are an indication of rising gasoline demand and falling crude oil production in the U.S.  
-    Put simply, motorists are consuming more and more gasoline, so refiners are purchasing more crude in order to meet that demand. That is providing a demand pull on crude oil, putting a floor beneath the price of WTI. At the same time, upstream production is falling. 
-    Although there has been a surge in speculative interest in oil contracts, the real world changes of supply and demand are improving. And that is reflected in the spike in gasoline refining margins. 

2.    Natural gas prices collapse in Europe

-    A natural gas war is starting to play out in Europe as Russia floods the continent in cheap gas in order to hold onto market share. 
-    Russia’s Gazprom is hoping to maintain its grip on the European market as gas prices start to slide. Gazprom is hoping to make up for lower revenues with higher volumes. Gazprom is set to export a record level of gas to Europe this year, close to 45 billion cubic meters. 
-    Another way of viewing the trend is that Russia is facing increasing competition in Europe. U.S. LNG just hit the market and Russia is hoping to box out American gas exporters by undercutting them. Officially Gazprom says it is merely compensating for falling European domestic production, but it appears that Gazprom may choose to suffer through a period of low prices in order to make it unprofitable for American exporters to send LNG to Europe. 
-    Natural gas prices in the UK have declined 37 percent in the past year. The price war is not unlike Saudi Arabia’s strategy in the oil market – keeping production elevated in the face of oversupply in order to force out higher-cost producers.  
-    “They are trying to defend market shares because they see -- like everybody else -- that failure to do so is going to allow more LNG -- not just U.S. LNG but any LNG -- to displace their pipeline supplies,” Jonathan Stern, chairman of the gas research program at the Oxford Institute for Energy Studies, said in an interview with Bloomberg.

3.    Long slide in productivity for oil majors 

-    The collapse in oil prices put an end to the boom years when the oil majors threw money at expensive and remote oil projects. Even when oil sold for more than $100 per barrel, the oil majors piled on more debt and spent money at record rates. 
-    Shell’s operating costs hit $14.70 per barrel in 2015, or more than double the $6 per barrel it spent on operations in 2005. BP’s operating costs tripled from $3.60 per barrel in 2005 to $10.40 per barrel in 2015.
-    But low oil prices tend to focus minds. The oil majors halted the rise in spending in 2015 – Shell’s costs plunged by 15 percent and BP’s declined by 19 percent. 
-    Oil and gas production per employee declined steadily since 2008, but BP and Total managed to reverse course last year by cutting staff and other operational costs. 
-    The big question is whether or not the oil majors can maintain dividends. Goldman Sachs’ Jeff Currie recently warned that the majors, including ExxonMobil, will have to cut dividends if oil prices stay in the range of $50 to $60 per barrel. They can cut expenses and hold onto dividends in the short run, but if oil prices don’t substantially rebound, the payouts could be on the chopping block. Exxon defied this prediction by announcing a slight increase to its dividend this week, raising it by 2 cents per share. 

4.    Contango disappearing 

-    The chart above depicts the difference between oil price futures: the difference of front-month deliveries to three months out (1-3), one to six months out (1-6), and one to thirteen months out (1-13). 
-    The differences have been negative for quite a while, which means oil for delivery in the near-term is cheaper than for delivery several months from now. That is an indication of a short-term supply glut. But the differentials are converging towards zero, illustrating the growing bullishness in the market – demand is rising and supply is falling, trends that are starting to erase the supply overhang.
-    For example, the Brent 1-13 spread narrowed from $5.07 per barrel in the beginning of April to just $3.23 per barrel by April 22. For WTI, the 1-13 spread narrowed from $6 to $3.57 per barrel over the same timeframe. 
-    As we reported a few weeks ago, the contango has at times temporarily shifted into backwardation, in which front-month deliveries are more expensive than contracts several months out. Supply disruptions in Kuwait, Nigeria, Iraq, and potentially Venezuela are going a long way to shrinking the contango. 
-    A full-on backwardation seems unlikely in a sustained way for now, given the massive volumes of oil sitting in storage. The contango could widen again if the supply outages are resolved (the Kuwait workers strike, for example, was only temporary).

5.    Credit lines getting cut

-    Wall Street is a very big reason why the U.S. shale boom took off. Now the banks are starting to rein in their lending. The major banks – JPMorgan Chase, Wells Fargo, Bank of America and Citigroup – have a combined $190 billion in outstanding energy loans to oil and gas companies, according to Bloomberg
-    Of the 57 independent North American oil and gas companies surveyed by Bloomberg, they were collectively cash flow negative for all of 2015. 
-    So far, 59 companies have declared bankruptcy since early 2015. The bankruptcies involved $27 billion in debt. 
-    Major banks are starting to cut credit lines, with the latest credit redetermination period underway. Collectively, banks cut off $5.6 billion in credit across 36 oil and gas companies so far this spring. 

6.    Oil states see rise in delinquencies for consumer debt

-    U.S. states dependent on oil, gas, and coal production are seeing an uptick in bad consumer credit as job losses mount, according to the WSJ. 
-    About 1.7 percent of all credit card users in Oklahoma were more than 90 days late on payments in the first quarter of 2016, a jump of 0.22 percentage points from the same period in 2014. For Texas, the delinquency rate is 1.8 percent. Louisiana tops the list at more than 2 percent. 
-    About 2.25 percent of all consumers with auto loan debt in Louisiana are more than 60 days behind payments, up from just 1.5 percent in 2012.
-    The deteriorating position for many ex-oil and gas workers is putting regional banks at risk. For instance, the delinquency on auto loan debt for Wyoming-based Pinnacle Bank surged 1 percent in the fourth quarter. 
-    Foreclosure rates in Oklahoma have posted seven consecutive monthly increases, year-on-year. 

7.    Venezuela’s shattered economy 

-    Venezuela has seen its economy collapse along with oil prices. The South American OPEC member suffers from an inflation rate exceeding 500 percent, a GDP set to shrink 8 percent this year, cash reserves rapidly falling to zero, and a rising pile of debt. Venezuela has $14 billion in bond payments due over the next year. 
-    The problem for Venezuela is that aside from war-torn Libya, Venezuela arguably needs the highest oil price in order for its budget to work out of all other OPEC members. RBC Capital Markets estimates that it needs $121.06 per barrel. Needless to say, oil prices are far below that level.
-    An electricity shortage has crushed the economy even further, as falling water levels at a massive dam has led to blackouts. A shortage of electricity could cut into Venezuela’s oil production, potentially in the next few weeks. RBC rates Venezuela as OPEC’s “most at-risk producer.”
-    Oil production could fall to 2.25 million barrels per day by the end of 2016, down more than 100,000 barrels per day from current levels. However, the risk is on the downside, with sudden supply disruptions a real risk as the economy continues to fall apart. 

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week. 

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Inside Intelligence with Southern Pulse

Global Energy Advisory - 29th April 2016

Politics, Geopolitics & Conflict

Splitting the Libyan Spoils

Let’s get Libya out of the way first. It should not be necessary to mention this, and in general we find it inadvisable to comment on foreign policy issues brought up by the campaigning of Donald Trump; however, because the U.S. intelligence community has seen fit to respond, we will note only that the Islamic State (ISIS) is not known to be selling Libyan oil. It has not made it that far. There is also the question of what ISIS would actually do with a major oilfield. It can manage small ones, but does not have the capacity to run a big one. Right now, their tactic is to threaten the big fields in order to use that as leverage to throw a wrench in unity government negotiations. 

Moving on to what’s really going on in Libya, control of the country’s oil reserves is indeed in question. ISIS is not the biggest threat in this respect. The eastern “government” in Tobruk is using its own branch of the Libyan National Oil Company (of Benghazi) to attempt to export oil unilaterally. It has in fact sent out its first cargo, bound for Malta; however, Malta is not allowing the cargo to dock and the UN has blacklisted the tanker carrying it. It’s since been ordered back to Libya, but it’s not going to offload its precious cargo without direct orders from the UN. The other Libyan government (the second of three) based in and controlling the capital, Tripoli, had vowed to block this export move. So far, it’s winning this phase of the battle. Whoever controls Libya’s oil, controls the government because its revenues are almost entirely dependent on oil. 

Right now, Libya has three governments and two National Oil Companies and two Central Banks—one each in Tripoli and Tobruk. That leaves the third government—the UN-backed Government of National Accord (GNA)—in a tight spot because it needs the support of both in reality, for any stability to emerge.   

On 30 March, the GNA’s UN-backed Prime Minister-designate, Serraj, showed up in Tripoli feeling a bit overconfident after the US and a handful of European countries recognized it as the legitimate government of Libya. They did this without any endorsement from the eastern government based in Tobruk, and without any support from the military factions of Libya. So basically, the GNA and the UN tried to move into Tripoli without any real backing, but they have made some headway (what price they paid for that, we’re not sure). On 25 April, the GNA took over the Foreign Ministry in Tripoli (and seven other ministries). In the meantime, the government in Tobruk has still not endorsed a GNA cabinet. So Tobruk’s move to export oil was immediately thwarted. The GNA, then, has largely won over the Central Bank and the NOC in Tripoli, and somehow managed to get past the Islamist-leaning government in Tripoli along the way, but the previously favored government in the east (the internationally recognized one) is playing 
hard to get and its own NOC is trying to export oil alone. 

Where the media-reading public probably gets confused is in the alliances here, which are anything but black and white and everything about divvying up the spoils. Readers tend to assume that the eastern NOC is the ‘’good guy” in this scenario because, after all, it was the eastern Tobruk-based government that was “internationally recognized”, while Tripoli was being controlled by an Islamist-leaning government, which everyone in the West immediately associates with the “enemy” in a knee-jerk reaction. However, it with the NOCs and the Central Banks that it gets trickier. The Tripoli-based NOC and Central Bank have remained recognized as the legitimate branches of these institutions despite Libya Dawn’s control over the capital city, which did not extend fully into the NOC or Central Bank. Tobruk overstepped by trying to make an independent go at oil exports through a parallel NOC. 

Croatia Back in the Syrian Oil Spotlight

Croatian media recently reported that the Syrian government has withdrawn its decision to grant oil fields owned by Croatian state-run INA to Chinese and Russian oil companies, after the intervention of former Croatian President Stjepan Mesic.

Vecernji List cited sources saying that Mesic used his previously established private relations with Syrian President Bashar al-Assad to save INA’s Syrian assets, as the Syrian government was against the company’s return to oil fields. Assad, of course, had good reason to want the Croats out of the picture—they allowed their country to be used as a transport point for weapons shipments to Syrian rebels early on in the conflict. A large amount of weapons was sent to Syrian rebels from Croatia between 2010 and 2013. The Saudis are believed to have financed the bulk of these weapons shipments through Croatia. 

While Mesic seems to have temporarily won INA a stay of execution with regard to its Syrian assets, their trouble isn’t over. In 2013, Croatia declared that it recognized the Syrian National Council as the only legitimate representatives of the Syrian people. The coalition’s main aim is to replace Assad. 

But Mesic apparently has special relations with Assad, and while he was president from 2000 to 2010, he visited Syria several times, and Assad also visited Croatia. The two also held several one-on-one meetings since the Syrian uprising in 2011. Mesic served as the mediator between Assad and the U.S. and EU. He also offered to mediate contacts with Syria and to host peace talks in his country.

INA’s Syrian oilfield investments are worth an estimated $1 billion. The assets include six oil, natural gas and condensate fields: Jihar, Palmyra, al Mahr, Jazal, Mustadira and Mazrur. INA began exploration activities in 1998 and concluded them in 2007, but it abandoned operations in 2012. It’s an issue now because Assad’s force recently took over these fields from the Islamic State (ISIS). Now, INA is hoping to get back into the game, but Assad isn’t all that pleased with Croatia’s conflict-time alliances and its role in arming Syrian rebels. 

Back in 2011, INA was under the pressure of its majority shareholder to divest its concessions in Syria. The company is a subsidiary of Hungarian MOL Group, which owns 47.16 percent of INA, while the Croatian government owns 44.84 percent. The rest of the shares are owned by private investors.

At the time, Croatian media speculated that MOL wanted to sell INA's Syrian oilfields to Russian partner Rosneft in order to weaken the Croatian company.

The truth is that the two countries had a series of disputes since MOL secured management control of INA in 2009 and the Croatian government filed several lawsuits over misuse of INA’s management rights. In 2012, Croatia found its former prime minister, Ivo Sanader, guilty of accepting a bribe in 2008 from MOL to grant it a dominant position in INA, without having to buy a majority stake. For its part, Hungary didn’t investigate the bribery case, while the Croatian government sued MOL’s CEO for bribery but a Hungarian court rejected the case. 

Yemen Government Retakes Export Terminal

Yemeni government forces say they have retaken the country's largest oil export terminal, Ash Shihr, from al-Qaeda on the Arabian Peninsula (AQAP). The terminal, which used to export 80 percent of Yemen's oil reserves, is one of a number of southern Yemen locations seized by AQAP since last year. The group tried to export some two million barrels of oil stored there but was unsuccessful.

Discovery & Development

•    By far the biggest discovery news of this week brings us to Iran, which has announced a new shale find that could eventually add significant tension to the geopolitical playing field, and the Saudis will certainly find it unsettling. Iran says it has discovered new shale oil reserves in Lorestan Province, and it’s nearly half through with studying the reserves, but is already calling the find ‘’significant’’. It’s not Iran’s first shale find, and Tehran has clearly been sitting on it for a while, keeping it fairly quiet and reviving the news for maximum effect. It’s also made a fair amount of progress in studying the extent of the find, which is another reason for the news. This particularly discovery is in the Garoo formation in Lorestan Province, and the authorities suggest it is the largest shale find yet in Iran, with other discoveries made earlier in to other provinces: Kerman and Semnan. The overriding sentiment is that this is something Iran will hold onto for the future because it can’t produce this shale at current market prices. Still, it’s a future threat to hold over the Saudis. For now, it’s got plenty of conventional resources to ramp up production of.
Deals, Mergers & Acquisitions

•    Husky Energy has agreed to sell a partial interest in Canadian midstream energy assets to two Hong Kong-based firms for $1.35 billion in cash. Power Asset Holding and Cheung Kong Infrastructure will acquire a 65 percent stake in assets located in Alberta and Saskatchewan. Husky Energy will retain the remainder. The assets consist of around 1,900 kilometers of pipeline and 4.1 million barrels of oil storage capacity.

•    Wood Group has signed a $500-million contract with BP to service its offshore Azerbaijan project. The deal covers eight offshore platforms for BP and includes the option of two, two-year extensions. Last October, BP awarded Wood Group project to provide subsea engineering services to these eight platforms, as well as to BP’s existing subsea infrastructure in the Gulf of Mexico and on the UK and Norwegian continental shelves.

•    Suncor will acquire a 5% stake in Syncrude Canada joint venture from Murphy Oil for approximately US$743 million. This brings Suncor’s stake in the Alberta joint venture to 53.74%. Earlier, Suncor made a $4.5-billion acquisition of Canadian Oil Sands, which owns a 36.74% interest in the Syncrude project. The deal should boost Suncor’s production capacity by 17,500 bpd. This is light sweet synthetic crude. 

Regulatory Updates

•    Rio de Janeiro state in Brazil is raising oil and gas taxes to close a budget gap that has led to closures of schools and hospitals and delayed pensions and public salaries. Last year, the state legislature passed an environmental levy that would allow the government to collect 77 cents per barrel. The method of collection was published on 28 April. This will make it more expensive for the oil industry to develop its offshore resources, and adds insult to injury from the industry’s perspective, as it is already reeling from the depressed oil prices. Rio de Janeiro produces two-thirds of Brazil’s entire oil output and around 40% of its natural gas.

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Inside Markets with James Hyerczyk

Bears Versus Bulls, Can This Rally Hold?

Now that June Crude Oil futures have cleared more than a few hurdles on the daily and weekly charts, it’s time to take a look at where it stands on the weekly chart to get an idea of its strength and to identify potential resistance areas. 

According to the monthly swing chart, the main trend is still down. However, the three month rally indicates that momentum has shifted to the upside. 

The main range is $65.93 to $30.79. Its retracement zone at $48.36 to $52.51 is the primary upside target. A long-term downtrending angle passes through this zone in April at $50.59 and in May at $48.59, making it a valid upside target also. 

Since the main trend is down, we expect to see sellers show up on a test of $48.36 to $52.51. The selling could come from new shorts or established longs booking profits. 

Bearish traders are going to try to produce a new lower top inside this zone. This is not necessarily a bad thing because in my opinion, the market needs to make one more correction and form a higher bottom in order to solidify its support base. 

Buyers are going to try to drive the market through this zone, but this is likely to be triggered by aggressive short-covering rather than new positions. I don’t believe that professionals are going to chase this market higher given the fragile supply/demand situation. 

If there is a spike move through $52.51, for example, it will probably set up a great shorting opportunity because the move will likely be caused by short-covering and speculative buying. This type of rally fails most often. 

If enough sellers do show up on a test of $48.36 to $52.51 then look for a much needed correction. The first target will be a steep uptrending angle at $46.79. This angle is moving $4.00 per month from the $30.79 main bottom. If it fails to hold as support then look for further pressure to drive the market into the next potential support angle at $38.79. 

The angle at $38.79, moving up at a rate of $2.00 per month from the $30.79 main bottom, will be a good place to consider going long since it will be pretty close to a 50% correction of the recent rally and a value zone. 

To summarize, according to the chart formation on the June Crude Oil monthly chart, we’re going to be looking for a selling/shorting opportunity between $48.36 and $52.51 during May. We’ll be looking to buy on a dip back to $46.79, but would really like to see a test of $38.79 because it represents value. 

The weekly swing chart tells us that the main trend is up. The trend recently turned higher when the market traded through the swing top at $43.17. 

Our swing chart analysis shows that the first leg of the rally was $30.79 to $43.17, or a rally of $12.38 in 8 weeks. 

We are currently finishing the third week from the $36.57 main bottom.  If we match the previous rally then we could see a rally to $48.95 by the week-ending June 3. This would put the market a little above the 50% level on the monthly chart at $48.36 and slightly above the long-term downtrending angle at $48.59. 

Combining the monthly and weekly charts reveals that we should pay close attention to the price action and order flow between $48.36 and $48.95 in May. Right now it’s too early to determine if it is going to stop the market. In other words, it’s just a target. Upside momentum and buying could be strong enough to drive right through it so I wouldn’t suggest selling a rally into it. However, I would consider selling it on the way down if the rally fails to take out $52.51. 

We want to try to maximize our gains during this rally so selling into a rally is not suggested because both the trend and momentum are pointed higher. However, if the market hits resistance between $48.36 and $52.51 and begins to sell-off we would like to go with the shift in momentum and sell a break back through the 50% level at $48.36. 

In summary, we believe the June Crude Oil market is nearing a serious resistance area and is ripe for a correction. However, because the buying is so strong, we don’t want to step in front of it. However, we will consider playing the short side if the buying stops inside our retracement zone and takes out support on the way back down. 

We are looking to sell weakness after the market hits resistance rather than selling strength which is a riskier trade since the upside momentum is so strong.
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