Thanks for all the Replies to my post a few weeks ago, from everyone on the board. Rather than crafting a new post I though I would simply cut and paste two emails I sent out last night, to trading friends. Again, thanks to all for replies earlier. Alot is happening.
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Action in Oil Part 1.
Re-Cap. Usually, at very speculative-long tops in Oil, the break from the top is very fast. And, on the way down, you get short-covering that causes rallies before the close. And then you fail again. Big breaks in price tend to start very fast over an initial 5 day period, and then you can get as much as 30 straight trading days of lower prices.
This pullback is not conforming to any of this. First, open interest started falling some time ago. Open interest is now very low. Plus the enormous volume the last 10 trading sessions, every day, totally eclipses the outstanding positions in Open Interest--collectively. NYMEX has regularly been doing 300K contracts every day now. That's 1.5 million a week. At 1.5 million contracts traded per week (at least) that is higher than the total open interest that has been tracking the past few weeks. This is way, way above-average volume. So look we are not churning all that open interest. Let me make this simple for you: at a time when Open Interest is relatively low, when the positioning among Commercials, Large and Small specs is tight and not extended in any way, volume in front month oil is freaking monstrous! The conclusion is easy: real world buyers, not speculators buying (or covering shorts), are coming in and buying front month oil to take delivery.
Open Interest: softwarenorth.net
On the fundamental side, things have only become more bullish for oil. Exports of oil to the USA are tanking! Days supply of Crude Oil and Distillates are both now a full two days below last year, and back around very low levels seen in 2004, or, in weak demand shoulder seasons. Only gasoline has ample Days Supply, at nearly one day higher, than last year.
This isn't rocket science: we are seeing real world declines in exports of oil, and it's causing the price to rise--and therefore is causing demand destruction. None of this occurs in a straight line. It's herky jerky. As I have said before, a handy rule of thumb is is takes global supply of oil on ships about 4-6 weeks to respond to shifts in demand, and price. What happened in 2008 is that Oil prices rose, then demand fell, but oil was already coming here so the price fell, and then the feed through from the previous demand finally fed through to supply--so then exports fell again and that's when price when through 135.00. Now we have price falling while supply to us is tanking!
Do you see? It's like a ratchet, that clicks only once or twice every 2 weeks. This is what happens when you import 65% of your oil, and oil is seaborne and takes time to get here.
So what's happened is that we have been outbid, for oil. And it's going elsewhere. It looks to me like Gasoline prices are going to pull back a touch, which could steady demand for 4-6 weeks. And then this will, like always, run into the current trend of less supply.
I'm looking for an attempt on 150.00 during the Hurricane months of August or September. If the structure of the Futures Open interest, and the action I am seeing in trading, and the supply were different, than I would say we have seen the high for this season. But, this looks to me like a typical double high coming--with at least a re-test of 135.00. (note also the equities in oil and gas appear to want to test the 50 dma so far, rather than the 200dma).
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Action in Oil 2.
Yes, look at that explosion in the volume of trading. ( s.wsj.net ) But it was not attended by a huge increase in Open Interest. The most recent highs in Open Interest were in July of 2007. Since then Open Interest has oscillated, but at lower levels. The average daily volume in trading in fact is even higher, than I claimed in my previous email, of above 300k. The WSJ here is saying it has zoomed above 600k. (Well, I only see the electronic trades. I don't see the Pit Trades.)
Oil is going up for two simple reasons. 1. The true smart money, that is investing pension money, wants to buy longer-dated contracts but is finding that commericals (oil and gas companis) are less and less willing to sell oil for delivery out there in 2012, and 2015. So what you have is a classic competition between two parties who get it. Yeah. They really get it. And then 2. Users are buying the stuff, for delivery. Again, there is no hoarding. We cleared out inventory last year. As I said, this massive volume is coming from Users. This is a very tight market where Users are no longer able to lock up all their intended volumes for delivery outside the futures market.
Hey, I listen to the oil and gas conference calls. All these guys in the process of letting their hedges roll off. They have very little for 2009, and virtually nothing for 2010. This is exactly what happened in the gold producer market starting in 2004. Look at what happened to Barrick. When the gold producers as a class were no longer willing to sell much gold forward, and it was Barrick that led the way on this, gold exploded higher and then the shares of the producers followed.
I'm not telling you what is going to happen. I am telling you what is already underway.
Remember, oil can go to any price it wants for a couple of weeks. It can go to 100.00 by the end of June, as far as I'm concerned. Or, it could turn tail and kiss 150.00 by mid-July. My point is that the Offer is being hit very hard by Users, because global supply is getting very, very dodgy, with alot of crappy, heavy crude on offer and a dearth of light sweet owing to Mexico export declines ( reuters.com ), and of course Nigeria problems.
This market is getting whacked hard with demand for global diesel, and declining exports. Yikes. I now predict the USA is going to go below 20 Days Supply, of crude. We have only hit the "teens" a few times in the last 5 years.
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Gregor |
