01-31-2008: March Crude Oil: OPEC Loses Control of Pricing to Speculators
OPEC ministers say that they have no control over prices of oil. Most people would scoff at that idea as OPEC controls at least 40% of the world's output of crude oil and is the largest group of producers. The U.S. and developed nations try to pressure OPEC to produce more oil to bring down the cost and meet world demand. But what is really happening here?
We tend to believe the OPEC ministers. They claim they would be perfectly happy with $60/barrel crude oil. They see that when crude oil prices reach current levels of around $90-$100/barrel, developed nations will be spurred to develop alternate energy sources. And there isn't much corn or soybeans grown in Saudi Arabia. So what can the Saudis do? If they can't bring down the cost of crude oil, they start investing in other diversified assets, buying up really cheap shares in American banks, industries, and land. Thanks to the policies of the Bush Administration to accommodate large corporations who wanted a weak Dollar in order to export more goods overseas, America is up for sale to foreigners. And they are buying like mad.
The Saudis claim that $30/barrel of crude oil is what they call the "speculative premium." This is money that goes to speculators counting on world calamities to destroy the crude oil distribution process, especially along the vulnerable Strait of Hormuz and the Iraqi pipelines. As the U.S. Federal Reserve lowers interest rates to "stimulate" the economy in a baldfaced panic move to accommodate stock markets, inflation again gets out of control and the mismanaged Fed will preside over higher and higher crude oil prices in the months to come. Demand for crude oil will keep rising in a growing global economic recovery.
March Crude Oil:
March Crude Oil:
The international situation remains tense for crude oil, which appears to have massive support at $85/barrel. Oil production worldwide has been relatively flat for the past two years while worldwide demand continues to grow. Refiners have not been able to keep up with gasoline demand. There is strain on producing heating oil for winter. World surplus production capacity is 1.5 million barrels per day, and all of it is in Saudi Arabia. Middle East politics remain tense. 20% of the world's oil flows through the Strait of Hormuz which Iran has full capability to block. Last September, OPEC agreed to increase production by 500,000 barrels per day as of November 1st. The Department of Energy estimates OPEC's actual production at 32.05 million barrels per day for the month of December. 2.3 million barrels comes from Iraq. This was up slightly from production in November. The DOE also estimated that 2008 production would increase worldwide by 2.8 mbd. That would mean world production would be at 87.65 mbd to cover consumption of 87.47 mbd. West Texas crude prices are expected to average $92.33 in the first quarter of 2008, up $58.08 from a year ago! U.S. crude stocks of late have been down 9% from a year ago. A year ago they were at 321.1 million barrels while now they are closer to 290.0 million barrels. OPEC insists it has not "gouged" the world community and is powerless to influence the turmoil in world financial markets. OPEC's president, who is also the Algerian oil minister, stated that "OPEC neither wants nor has the ability to control prices." The U.S. and other large consuming nations are calling upon OPEC to boost production. OPEC blames a hodge podge in world politics, monetary and fiscal policy for the hefty speculative premium in oil prices. OPEC estimates the real cost of production of oil at around $60/barrel, with a $30 speculative premium built in to oil prices. OPEC likes the recent Federal Reserve rate cuts to stimulate economy and oil consumption. Violence in Kenya has disrupted shipments of fuel supplies in both Kenya and Uganda. Some crude oil shipments have been piling up in Qatar ports, originally bound for Asia. Weather conditions in Canada have shut down production of the largest oil sands producers, which could affect Midwest oil refiners. Oil production at a major Mexican oil field could fall by 16% this year. The Fed's recent panic action to appease markets and avoid recession will quickly be felt in inflated energy prices most analysts predict. The trade is expecting a sizeable build in crude oil stocks, but its effect may be muted by the Fed decision.
105.0I T 1/30
I NYM - Mar-08 Crude Oil, 1000 bbl, $/bbl Cm.=0.03 Lim.= 2.9
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The above point-and-figure chart is giving a conventional sell signal.
We are headed toward a cyclical high and a seasonal up period.
Our best-performing internal program is "LSS3Day." It is giving a buy signal.
Results of "LSS3Day" for Crude Oil (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has given a sell signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $1,000. Initial margin on a single contract is $5,265. Use of options is advised.
Scale trade sellers are entering the market for the long term in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that no major change in direction from up is imminent at a volatility low point.
Our option trade recommendation is to Sell the Crude Oil May 95.5 Put @ 6.80 or better.
Here's an intraday chart for the previous day ( 1/30 ).
Risk Versus Opportunity Report
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CLH8 March Crude Oil
High Price: 101.46
Current Price: 92.33
Low Price: 87.87
Risk: 0.094
Opportunity: 0.193
(O/R) Ratio = 2.047
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | + 1 |
| Nirvana Chart | + 1 |
| News | + 1 |
| Point & Figure | - 1 |
| Cyclicals | + 1 |
| Seasonals | + 1 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | - 1 |
| Historic Range | - 1 |
| Range/Volatility | + 1 |
| Level Table | + 1 |
| Other Factors | + 1 |
| Total | + 5 |
Place 2 March Crude Oil on a Buy Watch with stoploss @ -2.99 below the get-in point.________________________________________________________________________________________________________R.S.
