subject: Where Next for the Crude Oil Futures Market? [print this page] Where Next for the Crude Oil Futures Market?
Every Wednesday the US government releases the latest oil inventory numbers and the recent figures have not been good for those speculating on a rise in prices. The weekly Energy Information Administration (EIA) reports have been showing rises in stockpiles.
The most recent report showed that crude oil inventories rose by 0.97m barrels to 358.3m barrels. Gasoline stockpiles also increased, the latest data showed a jump of 1.59m barrels to 226.1m barrels.
Whilst the figures were unexceptional they were unexpected. Financial news agency, Bloomberg had reported that inventory levels had been expected to drop due to the 8 day shutdown of the Enbridge Energy pipeline, ie the pipelines that supplies Canadian oil to America's Mid-West.
Buy what does this mean for the crude oil markets? According to Simon Denham of Financial Spread, "We can see that the irresistible attraction of $75 per barrel seems to be working its magic once again. Following the pattern of the past few years, the November futures contract was $1 higher than October. Once again we can see that long-term sellers are picking up this $1 per month price difference.
"In the futures markets, this upward sloping price curve is called a contango' and so far in 2010 the contango has given us more than $10 to the bottom line. If you were spread trading with a rolling sell position' held since January, you would effectively be short of the crude oil market at $85. With the price hovering around $75 that would be a good position to have. Although you would need deep pockets to cover the volatility that that crude oil market often experiences".
Looking at the technical indications, at some point crude may break above the $83/$86 level, having said that, do not hold your breath. As discussed above, inventories remain solid and fuel efficiency is ever improving.
For all of the growth of the world economies over the last 5 years, it is important to realise that oil production has actually fallen and yet there has been no massive strain on prices.
Given that both Brent Crude Oil and US Crude Oil (also known as Light Crude and Nymex) are priced in US dollars any weakness in the dollar will often translate into higher oil prices. And it's the current dollar weakness that seems to be supporting the oil futures market.
According to Christopher Beauchamp of IG Markets, "The US Federal Reserve's Open Market Committee has intimated that America's slowing inflation and sluggish growth might require further action from the US Government. That action could start as early as November 2010 and would be likely to weaken the dollar.
"Although if you are trading the crude oil market note that the next price direction may not be that easy to read. The increase in supply arising from the slowing American economy stands in sharp contrast to robust consumption levels in emerging markets, Chinese demand for oil expanded by 7.6% in August 2010."
Note the spread trading carries a high level of risk and you can lose more than your initial investment. Before trading, please ensure that spread trading matches your investment objectives. Familiarise yourself with the risks that are involved. Seek independent advice if necessary.
