Weekly Crude Oil Report

Crude Oil: The Cat Isn’t Dead Yet.

Summary: After a long sell-off dating back to May 2nd, a short-term bottom and relief rally may be in store next week.

Activity Recap

Last week was a disaster for Oil bulls. The week started out looking as if an attempt to retrace last month’s sell-off would begin. Monday opened above last week’s close and seemed poised to break $85.00. However by day’s end that was not to be. Tuesday was a slightly higher day, at least giving hope that a sideways consolidation was in the cards. Wednesday destroyed illusions of a bottom, with the market settling below the $81.11 low of June 11. This was a broken Triple Bottom and the market was thus attacked on Thursday, closing at $77.96. However, Friday’s activity ended the week on a less negative note. (PDF at bottom)

From open to close, Friday had all the ear-markings of a bottom put in at least in the short term. Volatility underperformed near the lows, and as the market crept higher, put sellers came in taking profits. A new low was established but the stochastics did not confirm it. And most obviously, the market finished positive. It traded as high as $80.37 before finishing at $80.15 on the Globex close.

Next Week:

Based on Friday’s activity and various models we use it seems a relief rally up to $84.00 is entirely possible now. Picking “V” shaped bottoms is not a specialty we claim, but here we see a market in dire need of a break and about to get one. Visually speaking, on the weekly chart between August and October 2011 there are several long wicks left behind after steep sell-offs. This is a sign of longer term fundamentally based buying, “bear-trap” for short. Last week’s close may have been such an event. To us, it simply makes no sense to short this market here. And if one is short, depending on the entry, a percentage should be taken off right now. We’d like to be flat, with a buy stop above $81.20 and a possible short entry below Friday’s low.

If we get above $81.20 early next week, there is no reason we shouldn’t attempt to traverse the range between there and the high of $87.03 on June 7th

That said, we feel that if there is a relief rally up t o$84.00 or beyond, this will merely set up an opportunity to get short again. Our longer term targets show the market handily taking out the lows of $74.95. Our models, the economy, and technology are all pointing lower in WTI over the next 18 months.

Analysis:

What fracking did for Natural Gas over the last two years, In-Situ retorting will do for Oil over the next two. Think of Moore’s law of computing applied to U.S. Oil production. We note the rig counts in Nat Gas dropping. These are new rigs, ones that are based on horizontal drilling. What are they doing? They are converting to oil because that is where the margins are. And it will continue until Oil is $70, $60 or possibly $30 per barrel. We have had a 10+ year bull market in commodities. New infrastructure and supply is coming down the pipeline. When you combine: in-situ processing, horizontal drilling, domestic finds like the Bakken, better automotive tech, Canadian Oil Sands, cheap Nat Gas, and a government mandate to decrease dependency on middle east oil; You will get lower Oil prices.

Horizontal Drilling and Fracking: Worked For Gas. It’s Working for Oil .

The United States Department of Energy estimates that the ex-situ processing would be economic at sustained average world oil prices above $54 per barrel and in-situ processing would be economic at prices above $35 per barrel. These estimates assume a return rate of 15%.

The much vaunted Cushing pipeline reversal is only bullish for Cushing Oil prices relative to Brent. But it is a massively bearish sign and just the beginning of North America’s growth as an oil exporter. Canada’s oil will flow through the U.S. now. It’s all just math. That and an absence of politicians decrying the evil short speculators in Oil….

Barring a Middle East event that turns Iran into a glass parking lot, we are Neutral/ Bullish now and will reassess on new lows, or price action above$84.00. We are Bearish longer term.