Crude Oil Mid-Week Analysis for the Week of November 28, 2011

Crude Oil

A surge in equity prices and optimism about a plan to help Europe has helped the crude oil market rebound after a one-week sell-off. This may be the headline
story circulating but the real reason is the market’s sensitivity to supply disruptions.

Oil refiners are currently battling poor refining margins and steep backwardation. Because of this they are keeping inventories at a minimum and buying crude oil when needed, setting up the possibility of market spikes on any sign of disruption.

The signs of disruption are out there too as it looks as if conditions are heating up in the Middle East once again, particularly in Iran. Escalating tensions in Iran pushed prices to $100 per barrel on Tuesday. The strong close has the market in a position to challenge the November high at $103.37.

With supply disruptions taking the forefront, it’s hard to tell how much of an influence the equity markets and the Euro have on the price of crude oil at this time. Given that the over month long rise in prices from $75.36 occurred while equity prices were falling and the U.S. Dollar was rising, it looks as if crude oil prices will remain strong.

News that U.S.consumer confidence rose this month to the highest level since July also gave crude oil a boost this week. This indicates that traders are still holding on to the idea that the U.S. economy is poised to recover despite the on-going debt problems in the Euro Zone.

Although an oil embargo against Iranhas been strongly suggested, it doesn’t seem likely at this time, given the state of the global economy. Cutting the supply of crude oil could send prices soaring which would drive up energy costs at a time when the global economy can least afford it. Besides worrying about an embargo, traders now have to think about the potential impact that violence against the British Embassy in Tehran by Iranian students will have on the
market. The start of another rally is not likely but the event should underpin prices over the short-run.

Oil prices could remain firm the rest of the week if equity prices and the Euro hold steady. The wildcard is the situation in Iran. If the developing situation escalates then traders are likely to push the market higher given the current tight inventory situation.

Factors Affecting Crude Oil This Week:

U.S. Supply and Demand:  Although supplies remain tight, the Weekly EIA report could hold as surprise. On Tuesday afternoon, the American Petroleum Institute said crude stocks jumped 3.4 million barrels in the week-ending November 25. The forecast called for a 200,000 barrel drawdown. Traders should approach Wednesday’s report with caution.

Euro Zone:  Optimism that a short-term solution to the Euro Zone debt problems may be close is keeping short-traders on the sidelines this week while giving the Euro a firm undertone. A stronger Euro means a weaker Dollar, helping to boost oil prices. Look for oil to remain firm as long as this condition exists.

U.S. Economy:  Since oil traders reacted to the better than expected consumer confidence report, they are likely going to respond to Friday’s U.S. Non-Farm Payrolls Report. A better than expected jobs report should be bullish for crude oil prices.

Published by

James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

Leave a Reply

Your email address will not be published. Required fields are marked *