DTN Senior Commodities Analyst Talks Oil
By Karl Heilman
06 Oct 2006 at 02:20 PM EDT
St. LOUIS (ResourceInvestor.com) -- Oil - the driving force of economies, lifeblood of industry and the enemy at the gas pump - has left many wondering what's the next turn on the rollercoaster price ride? Resource Investor speaks with DTN senior commodities analyst, Darin Newson, to get the facts.
RESOURCE INVESTOR: Summing up the oil market at the moment, can you explain why oil is riding the price roller coaster?
DARIN NEWSOM: The market rallied on a steady stream of "what-ifs" and "maybes," which sparked heavy noncommercial / investment buying. However, the underlying supply and demand situation remained bearish. As the market became overpriced and these investment traders realized the risk to the downside outweighed the upside reward potential, they began to liquidate their net-long futures position. With no support from the underlying fundamentals, the market had nothing to act as a backstop allowing contracts to freefall.
RESOURCE INVESTOR: Any thoughts on yesterday’s talk that OPEC may cut nearly one million bpd of production daily? If so, how will this affect the markets?
DARIN NEWSOM: It's my belief that anything that can affect the market is already known by those in the market. Therefore, "news" has already been digested and registered in the trend of the market. In other words, trend is the general consensus of all market participants regarding price over time. If those market participants have already built the news into price and the market continues to trek lower; this should be a good indication of the affect the news had on the market.
RESOURCE INVESTOR: Barclays is predicting crude price averages of $76.60 for 2007, the IMF recently raised its 2007 forecast to $75.50, while the median forecast expectation for 2007 is $64 a barrel. Where do you stand, what are you calling and why?
DARIN NEWSOM: In my opinion, trying to forecast price is the proverbial problem of pinning jello to a wall (nearly impossible besides being pointless). There is no way to know what issues may arise that could have a dramatic, unforeseen affect on future prices. However, given this snapshot in time there are things we do know about the market that tell us what type of market situation exists.
1.
The long-term uptrend remains in effect.
2.
This uptrend reflects the continued bullish outlook, though not as bullish as it once was, of the noncommercial/investment trader.
3.
The underlying fundamentals remain bearish, as evidenced by the continued contango in the market.
4.
Following its late summer through late fall decline, the market seasonally establishes a low in late November.
5.
The spot-month November contract continues to trade in the upper 20% of its historic price probability range.
6.
Implied volatility remains high, but not as high as the other energy markets.
Given the fact that the long-term uptrend remains in place, the recent selloff should be viewed as a normal retracement. Noncommercial traders (whose activity has a substantial influence over price direction) have trimmed their net-long futures position leading to the retracement. Further liquidation could take spot-month futures to near $56. If that level fails to generate renewed buying interest or turn the fundamentals more bullish, spot-month futures could slip to $52.50 or possibly $44.40 with the latter the 50-percent retracement level of the long-term uptrend. How far the market falls will depend on how the nearby to deferred contract spreads begin to react. However, the market should find its low over the next 4 to 6 weeks. Once the large investment traders view the upside potential as greater than the downside risk, the market should once again be set to rally.
RESOURCE INVESTOR One can speculate that oil will be trading in the $50-$80 area for quite some time, are prices stuck in this range? Can we continue to expect these wild price fluctuations?
DARIN NEWSOM: The $50 to $80 range sounds logical. The other day when I was asked this question, my initial response was $45 to $90. However, we can't forget that if/when the market begins to rally on renewed investment interest, particularly if supported by the underlying supply and demand situation the market could ultimately establish new highs well above $80. While a move below $50 is possible (50% level again is near $44.40) a sustained downtrend seems unlikely.
RESOURCE INVESTOR: What has contributed to crude’s seven month low seen recently? Will we see it lower anytime soon?
DARIN NEWSOM: As stated above, the selloff in crude has been a function of the liquidation of the investment long-position without benefit of support from the supply and demand situation. The market should continue to move lower until investment traders become interested in buying the market again.
RESOURCE INVESTOR Recently, Michael Economides said there were three things that could send oil soaring to $100: If Israel attacks Iran preemptively, an Al Qaeda terrorism attack on the Saudi oil, infrastructure; or if Hugo Chavez starts sells the majority of Venezuela’s oil to China. What are your thoughts on this?
DARIN NEWSOM: How about if the sun didn't come up one morning? Or the Kansas City Royals win the World Series? In all seriousness though, we don't know tomorrow's news. That's what made the television show "Early Edition" fun to watch. What if we did know?
In reality though, Chaos Theory - or the Butterfly Effect - reigns. An insignificant, unforeseen event - or large event, as you indicated - occurring in one place can have catastrophic results far away (remember the butterfly flapping its wings in Beijing that causes a thunderstorm in New York). Could these three items come to pass? Sure, but so could a whole multitude of other events. And with crude the new geopolitical hedge the market will remain aware of all these unknowns.
RESOURCE INVESTOR: Any additional comments on the oil market and where it’s heading?
DARIN NEWSOM: All we know is that the market will tell us its view of world events as they unfold, the best we can do is read, or decipher what it has to say. |
