Crude Oil Futures: Bulls Looking Spiffy If Oil Can Go Over $50

Fundamentals

The saying “every dog has its day” is quite apropos for the Crude Oil market, which has demonstrated a bit of a price recovery the past 3 weeks despite the slump in equity prices.

This divergence between Oil and equity prices is mostly due to the supply side of the Oil equation, with U.S. Oil stocks beginning to fall, especially in Cushing, Oklahoma, the delivery point for the NYMEX Crude futures contract.

OPEC has cut production levels to try to stem the sharp price declines in Oil prices due to the continued world economic slump, with estimates that Cartel members are generally adhering to their quotas, with between 80 and 85 percent compliance. This weekend is will bring about the next OPEC meeting in Vienna, with some analysts looking for as much as an additional 1 million barrels per day production cut being announced. However, there is also an opinion that Saudi Arabia will push for stronger compliance to the existing 4.2 million barrel per day cut before any additional cuts are put on the table. Nigeria’s oil output continues to be disrupted by political strife, as attacks by militants on oil pipelines and infrastructure are estimated to have cut the country’s production by about 25%.

So while the supply picture has turned a bit more bullish, there is still little evidence that the demand picture has improved. That certainly is that case for the U.S and Europe, with continued job losses and declining industrial usage suppressing fuel demand. The EIA has lowered its estimate for U.S. oil usage in the 2nd quarter of 2009 by 4.2% vs. year ago levels.

The news out of China for Oil demand is mixed, with auto sales rising 25% in February and the EIA forecasting a 2.3% increase in Oil use for the 2nd quarter of this year.

However, overall consumer prices in China fell for the first time in nearly 7 years, falling 1.6% in February vs. last year, which brings about the concern that deflation may also appear in the world’s most populous country.

Technicals

Looking at the daily chart for May Crude Oil, we notice prices finally being able to hold above the widely watched 20-day moving average. However, Tuesday’s close near the lows of the session may make weak longs a bit nervous.

Large speculators continue to hold a net-long position in Crude Oil according to the most recent Commitment of Traders report. As of March 3rd , large non-commercial traders were holding a net-long position of 77,718 contracts. However, this was down 19,579 contracts from the previous week, as weak longs booked profits on the initial rally off contact lows made in mid-February.

We are currently in the middle of the roll-over from the April to May futures for the United States Oil Fund (USO), which in the past has caused quite of bit of volatility in the nearby spreads. This month’s roll-over seems quite tame, as improving supply fundamentals has tightened the April/May spread and lessened the desirability of bear spreading by speculators ahead of the rollover.

Besides psychological resistance at the $50 level in the May futures, resistance is found near the 50.45 to 50.50 area. Support is seen at the March 3rd lows of 41.75.

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