Afternoon Price Check, September 2: Oil Prices Post More Gains on Economic Data and Hurricane Threat
Crude oil prices dipped this morning before bouncing back in afternoon trading at the NYMEX. (image: ft.com)
Fresh tidbits of positive economic news brought increases in crude and heating oil prices at the NYMEX for the second day in a row today. Official data released on Thursday showed a small decrease in new unemployment claims this week, an increase in pending home sales during July, and a rise in factory orders for commercial airplanes and other oil-dependent products. Those economic factors provided primary support to oil prices, while Hurricane Earl’s threat to East Coast refining activity and an oil rig explosion in the Gulf of Mexico added secondary support. The price of crude closed near $75 per barrel, the middle of the $70 to $80 range it has been contained by in recent weeks. US stock markets also posted gains today, helping to lift oil prices by building general economic optimism. The increase in the market price for heating oil will likely bring a modest increase in retail prices tomorrow. Despite Wednesday and Thursday’s short-term gains, medium- and long-term oil prices show few sings of staging a sustained climb under huge supplies and general economic uncertainty.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Up 1.5 percent, $75.02 a barrel
Heating oil (October 2010 contract): Up 1.5 percent
Afternoon Price Check, September 1: Oil Prices Bounce Back on Stock Market Gains
Crude oil price jumped at the NYMEX today on tidbits of positive economic news that also sent stock markets climbing. (iimage: ft.com)
After dropping sharply to end the month of August yesterday, crude and heating oil prices rose steeply at the NYMEX today, following surging stock markets. News that both US and Chinese manufacturing increased last month gave a major boost to perceptions of the American economy and future global oil demand. This morning’s petroleum inventory report from the Energy Information Administration showed a substantial increase in crude oil supplies and only modest decreases in gasoline and distillate (a category that includes heating oil) supplies last week, but it was brushed aside by traders in favor of new economic hopes spurred by manufacturing data. Record-high crude and oil product inventories and a shaky economy still loom over oil markets and remain important factors in considerations of short- to medium-term crude and heating oil prices. Big market gains brought a four-cent increase in retail heating oil prices around 11 am today, and those gains will likely hold on through tomorrow morning.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Up 2.7 percent, $73.91 a barrel
Heating oil (October 2010 contract): Up 2.6 percent
Afternoon Price Check, August 31: Oil Prices Continue Slide on High Supplies
A weak US economy and massive supplies of petroleum products sent the price of crude plummeting on Tuesday. (image: ft.com)
The huge supplies of crude oil, gasoline, and distillates (a fuel category that includes heating oil and diesel) weighed heavily on oil prices today, sealing considerable declines during the month of August. A bearish supply and demand picture in the US was aided in bringing prices down by the closure of the September contract on heating oil and other finished petroleum products. With near-term prospects of higher prices almost non-existent, front-month (nearest month) contracts for crude and heating oil are extremely unattractive investments. The declines will likely bring a major decrease in retail heating oil prices tomorrow. Most market watchers expect tomorrow’s petroleum inventory report from the Energy Information Administration to show another increase in already record-high stockpiles. If so, expect more declines in crude and heating oil prices for the rest of the week.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Down 3.7 percent, $71.92 a barrel
Heating oil (September 2010 contract): Down 2.6 percent
Afternoon Price Check, August 30: Oil Prices Drop on Stock Market Declines, Economy
The price of crude oil fell today as the outlook for the US economy remained bleak. (image: ft.com)
Crude and heating oil prices slipped at the NYMEX today, as the momentum from Fed Chairman Bernanke’s encouraging comments on the US economy wore off and stock markets sunk. With record-high supplies of petroleum products and relatively weak demand, oil prices of late have been increasingly led by stock market indexes and other economic indicators. Improvement in the economy is required for growth in oil demand and sustained price increases. New economic data to be released tomorrow will provide the latest positive or negative drivers of oil prices.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Down 0.6 percent, $74.70 a barrel
Heating oil (September 2010 contract): Down 0.9 percent
CFTC Regulators Call for Better Oversight of High-Tech Trading
CFTC Commissioners Scott O'Maila (left) and Bart Chilton (right) agree that Infinium's "haywire" algorithm is proof that greater oversight of electronic trading methods is required on commodities markets. (images: cftc.gov)
In response to a report last week on a flawed trading algorithm that caused a spike in oil price volatility, two members of the Commodity Futures Trading Commission called for tighter regulation of computer-based trading. Reuters reported on Thursday that commissioners Scott O’Malia and Bart Chilton both characterized the flawed algorithm created by the Infinium trading company as an example of the dangers posed to market stability by increasingly computer-based trading practices. The commissioners went on to say that new regulations should focus on computer-based trading, as current regulations meant to govern in-person, open outcry trading of oil and other commodities are inadequate.
In recent years, commodities trading has been increasingly conducted electronically, and as trading software has become more sophisticated, traders are now able to execute hundreds of trades per second in a practice known as high-frequency trading (HFT). The computer algorithm created by Infinium Capital Management was used for HFT for only five seconds before its operators shut it down on February 3. But five seconds was enough time for the out-of-control algorithm to place thousands of buy orders that drove up the price of crude by $1 per gallon in less than four minutes. The following day, chaos generated by the faulty algorithm led to a sharp drop off in oil prices as wary traders sold off positions.
Neither Chilton nor O’Malia went so far as to condemn HFT outright, but both agreed that new regulations are required to keep up with rapidly evolving technical trading practices. The financial reform bill signed into law by President Obama on July 21 grants wider power to the CFTC in its regulation of commodities and derivative markets. The commissioners’ recent comments made it clear that specific regulations of HFT and other computer-based practices are at the top of the commissions to-do list. O’Malia told Reuters,
Whatever we do, the risks posed by high speed and algorithmic trading must be handled with great care because when things go wrong, five seconds can generate a lifetime’s worth of trading, not to mention a toxic trail.
New regulations will hopefully provide some protection from the wild volatility that has marked crude and heating oil prices in recent years by reigning in electronic trading’s influence over prices and limiting market participation by big-money speculators. A little bit of added oversight could go a long way toward making the prices that heating oil dealers and consumers pay for their fuel more predictable and less disruptive to their bottom lines.
Afternoon Price Check, August 27: Oil Prices Continue Climb on Stock Market Gains
Fed Chairman Bernanke's pledge to take decisive action on the economy boosted stock and crude oil prices on Friday. (image: ft.com)
Much-anticipated comments from Fed chairman Ben Benanke boosted confidence in the US economy and sent stocks rising, which brought oil prices higher for the third day in a row. Tropical storm Earl also lent some support to prices as it moved toward the Gulf coast, setting off concerns that it could disrupt US refining operations. Moderate gains by crude and heating oil prices at the NYMEX will likely bring moderately higher retail heating oil prices on Monday.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Up 2.5 percent, $75.17 a barrel
Heating oil (September 2010 contract): Up 0.6 percent
Price Check, August 26: Oil Prices Continue Upswing on Dip in Unemployment
The price of crude oil was on the rise for most of the trading day on positive news on US unemployment and a weak dollar. (image: ft.com)
Oil prices rose for the second day in a row on Thursday, supported by a not-so-bad weekly jobs report and continuing weakness in the US dollar. A US jobs report showed that new unemployment claims decreased last week, giving some reason for optimism that the economy could be on the road to recovery and oil demand could pick up in the coming weeks and months. The falling dollar also helped support oil prices by making the commodity cheaper to holders of foreign currency. As was the case on Wednesday, bullish news outweighed the most recent report on petroleum inventories that showed increases in all three categories of fuel. Today’s increases in the market prices of crude and heating oil will likely bring another significant increase in retail heating oil prices on Friday.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Up 1.2 percent, $73.36 a barrel
Heating oil (September 2010 contract): Up 2 percent
Oil Trading Firm Under Investigation for Causing Oil Price Spike With Computer Trades
The minute-by-minute and day-by-day effects of Infinium's "haywire" algorithm on the crude oil market in early February of this year. (image: graphics.thomsonreuters.com)
CME Group, owner of energy commodities market the New York Mercantile Exchange (NYMEX), has announced it will investigate how a company using a sophisticated oil trading computer algorithm allegedly caused the price of crude oil to jump one dollar in a matter of minutes. The Wall Street Journal reported on Thursday that on February 3 of this year, trading company Infinium Capital Management unleashed an electronic trading formula known as an algorithm on the NYMEX that was intended to execute complex transactions involving crude oil futures contracts. But less than a second after it was switched on, the algorithm malfunctioned and issued thousands of buy orders for crude contracts, driving up the price by a full dollar per barrel in the blink of an eye. Only five seconds later, operators shut down the faulty algorithm, but not before it executed thousands of trades, drove up the price of crude, and lost the company $1 million. All of this took place just four minutes before the NYMEX oil-trading floor closed at 2:30 pm. The confusion over the sudden last-minute price spike led to a 5 percent drop in oil prices the next day. The Journal detailed the outsized effect the algorithm had on the market:
At 2:26 p.m. in New York trading on Feb. 3, four minutes before the end of Nymex floor trading, volume spiked in the light, sweet crude futures contract. The March contract shot up 51 cents in a matter of seconds. Volume also surged—from 963 March futures contracts traded at 2:25 p.m. to 8,410 at 2:26 p.m.
The incident is something of a worst-case scenario for high frequency trading, the practice of using software to execute thousands of market transactions per second. Increasing numbers of traders are using high frequency trading to turn big profits on tiny price differences on commodities and other products. Concerns over the practice are twofold: that individuals or companies engaging in high frequency trading gain an unfair advantage over traders without access to the sophisticated and expensive software it requires, and that making many times more trades than would be humanly possible could seriously disrupt markets and cause protracted price volatility. The second concern seems to have been realized with Infinium’s February 3 debacle.
A similar technical error is suspected as a partial cause of the May 6 “flash crash” that sent the stock market plunging for no apparent reason. The results of an investigation into the causes of the flash crash are expected out next month.
Infinium said that they notified CME Group of the algorithm malfunction and resulting trades immediately after they occurred, and that they have fired the designers of the algorithm. There’s no sign that the company will be accused of intentional wrongdoing.
Regardless of Infinium’s intent, the incident made abundantly clear the power that high frequency trading and similar practices hold over markets. Earlier this week, oil analyst and author Raymond J. Learsy made a forceful argument that new technology-based speculative practices like high frequency trading are the main forces behind inflated oil prices.
Hopefully newly-enacted financial regulation and oversight well help curb the influence of new speculative techniques over oil prices and prevent sudden increases in crude and heating oil prices that are the result of a trading firm trying to squeeze more profits out of a few minutes of market activity.
Afternoon Price Check, August 25: Oil Prices Up Despite Inventory Builds
A bearish inventory report kept the price of crude oil down on Wednesday morning, but a surging stock market and weak dollar led it higher by the afternoon. (image: ft.com)
Oil prices turned around on Wednesday afternoon after five losing days on the power of a weakening dollar. The increases in crude, heating oil, and gasoline prices came as something of a surprise, as the EIA’s petroleum inventory report showed an increase in all three categories last week. Increases in crude, gasoline and distillates (which include heating oil) usually send prices downward, as they are a sign of a decrease in demand and consumption. But a weaker US dollar and rising stock markets were enough for traders to look beyond the bearish signs of the inventory report and invest in oil. The unexpected reversal will likely bring a substantial increase in retail heating oil prices on tomorrow.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Up 1.7 percent, $72.52 a barrel
Heating oil (September 2010 contract): Up 1.8 percent
Afternoon Price Check, August 24: Oil Prices Slide for Fifth Day in a Row
More news reinforcing the fragile economic recovery in the US brought a steep decline in crude oil prices at the NYMEX on Tuesday. (image: ft.com)
Fears of continuing economic stagnation and low demand further tightened their grip on oil markets today, leading crude and heating oil prices to close lower for the fifth consecutive day. An announcement from the president of the Chicago Federal Reserve that stated the risk of a double-dip recession is higher now than it was six months ago was the latest data to support concerns over the US economy sluggish pace of recovery. The end of an extremely calm driving season contributed to further declines in gasoline prices, which also put a drag on crude and heating oil prices. Another modest decrease in retail heating oil prices will likely come on Wednesday as a result of Tuesday’s market losses.
Today’s Closing Prices at the NYMEX
Crude oil (October 2010 contract): Down 2 percent, $71.45 a barrel
Heating oil (September 2010 contract): Down 1 percent
Analyst Learsy: Speculation, Manipulation Continue to Artificially Prop Up Oil Prices
According to commentator Raymond J. Learsy, more sophisticated computer-based trading of oil investmet products is empowering speculators and driving up oil prices. (image: miltchtrading.com/eng/)
When we discuss crude and heating oil prices around the HeatingOil.com newsroom, our conversations frequently end with the phrase, “it just doesn’t make sense!” Author and oil market commentator Raymond J. Learsy, continuing on his tenacious fight to expose unethical (and in some cases, illegal) market manipulation by oil speculators, began his latest piece on the Huffington Post with a derivation of that refrain: “It makes no sense.”
Learsy goes on to explain that what makes no sense are recent oil prices. Despite losses over the last week, oil prices have been increasing steadily for the last year, while supplies continue to increase and the economic slowdown has kept oil demand remarkably low. In March of this year, I wrote an opinion piece that drew on previous writings by Learsy and made the case that speculative activity on oil markets was clearly the main determinant of prices, and that fundamental forces supply and demand had for months (maybe years) occupied a distant second place on the list of influences over crude and heating oil prices. Since then, Learsy argued on Monday, little has changed. The US is so flush with crude oil that millions of barrels of the stuff are in floating storage off of our coasts—high supply. Unemployment and general economic weakness have kept demand historically low. According to the basic premise of free market economics, these two circumstances should make for consistently low oil prices. But since it hit a low point of $33 per barrel in February of 2009, the price of crude has been on a pretty consistent upward track.
So if fundamental forces are not driving oil prices, what is? According to Learsy and many others, the answer is speculators. Investors with no interest in buying physical oil have flooded the commodities market in the last decade, and many believe that the massive amounts of money being funneled into energy products like crude oil have essentially disconnected their prices from the realties of the physical world. After recounting his opposition to the outsized influence of speculators over the oil market, Learsy brings up a new point—that technology has made new kinds of speculation easier, and that investor dollars can now flow more freely between commodity and stock markets. Quoting an article in the Wall Street Journal, Learsy provides a summary of the new market dynamic he believes is behind artificially-inflated oil prices:
“In recent years commodity exchanges have built up their technologies to allow easier access for computer based traders which have become a dominant force in some markets”. That traders “tend to do the same thing at the same time not because of the fundamentals rather because there is so much money under management that they have become the markets.” According to another trader quoted in the article, “Whatever is producing this phenomenon is growing in force not waning in force.”
Indeed, technological advancements in derivatives trading (some of which are based on oil futures contracts) have fundamentally changed how markets operate. These new advancements, Learsy argues, only augment the considerable power over oil markets already held by big money investors and other speculators. As proof, he refers to the recent fine the Commodity Futures Trading Commission (CFTC) levied against a trading group for manipulating the market in pursuit of the “first print” of a $100 per barrel oil contract. If one trading group has the power to create, in the CFTC’s words, a “non-bona fide price” for oil, Learsy posits, what’s to stop any other group from doing so on any given day?
To fight speculators’ manipulation of oil prices, Learsy urges “Congress [to step] in to restrict participation by computer-based traders,” and “bring some rationale, some sanity, some semblance of fair play back to the oil trading pits.” He subsequently laments the unlikeliness of such an occurrence, citing the power of investment interests and the sway they hold over politicians in the form of massive campaign contributions.
Although Learsy’s conclusion sounds a bit cynical, it certainly contains some truth. While the financial reform bill did confer increased power to the CFTC and set new limits on speculation, phenomena such as technical traders gaining new access to oil contracts will no doubt continue as long as investment banks, hedge funds and other Wall Street interests hold money-backed power in the political system. The only force strong enough to combat moneyed interests in the battle for political support from Washington is the outrage of Americans tired of paying too-high prices for heating oil and gasoline.
Judging by Learsy’s belligerent tone, that’s the exact force he is trying to build up.
Afternoon Price Check, August 23: Gasoline Leads Oil Prices Down Again
Crude oil prices rose to begin the trading day, but later fell under the weight of plummetting gasoline prices and a stronger US dollar. (image: ft.com)
After showing modest upward movement this morning, crude and heating oil prices dropped and ended the trading day below their opening positions for the fourth day in a row. Crude oil ended the day at its lowest closing price since July 6. In an unusual turn of events, the price of gasoline dropped sharply and was a significant factor in falling crude and heating oil prices. The US dollar, which was losing value at the open of the trading day, reversed course and strengthened, putting added downward pressure on oil prices. Falling stock indexes provided further proof of US economic weakness and experts confirmed that tropical storm Danielle would not affect refining operations on the Gulf Coast, both of which contributed to lower oil prices. Lower prices on NYMEX will likely bring a small decrease in retail heating oil prices on Tuesday.
Today’s Closing Prices on the NYMEX
Crude oil (October 2010 contract): Down 1.2 percent, $71.98 a barrel
Heating oil (September 2010 contract): Down 0.7percent
Afternoon Price Check, August 20: Oil Prices Continue Slide on Weak Economy, Stronger Dollar
A raft of negative economic data accumulated over the course of the week brought another down day for crude oil prices on Friday. (image: ft.com)
More negative news on the US economy emerged on Friday, driving down oil prices for the fourth day this week. Thursday’s government report that showed a major increase in US unemployment claims last week continued to loom over oil markets and undermine hopes of any soon-to-come increases in oil demand. According to CNBC, an announcement on Friday from the Economic Cycle Research Institute stated that a measure of future economic growth fell to a three-week low, which contributed to pessimism on the US economy and falling oil prices. Stocks also moved lower on US markets, putting further downward pressure on crude and heating oil prices at the NYMEX. Today’s declines will likely bring another moderate decrease in retail heating oil prices on Monday.
Today’s Closing Prices on the NYMEX
Crude oil (September 2010 contract): Down 1.3 percent, $73.46 a barrel
Heating oil (September 2010 contract): Down 1.3 percent
Afternoon Price Check, August 19: Oil Prices Drop Again on Economic Data
Crude oil was on an upward track for most of the day, but bottomed out after the release of negative economic data in the afternoon. (image: ft.com)
After moving upward on promising news from Germany oil prices slipped on new economic data that were not good signs for economic recovery in the US. The US Department of Labor reported 500,000 new state unemployment claims were filed last week, which underscored the nation’s serious joblessness problem and intensified fears of a double-dip recession. Manufacturing activity in the Mid-Atlantic region slowed for the first time in over a year last month, according to the Philadelphia Federal Reserve—another sign of the country’s economic weakness and uncertain future. Both crude and heating oil closed more than one percent below their opening prices on the NYMEX, which will likely bring a moderate decrease in retail heating oil prices tomorrow.
Today’s Closing Prices on the NYMEX
Crude oil (September 2010 contract): Down 1.3 percent, $74.43 a barrel
Heating oil (September 2010 contract): Down 1.1 percent
Afternoon Price Check, August 18: Oil Prices Close Slightly Lower on Mixed Inventory News
The price of crude recovered from some midday losses, but still closed lower on the NYMEX. (image: ft.com)
Petroleum inventory data from the EIA released this morning, though less bearish than yesterday’s report from the API, held down crude and heating oil prices on NYMEX for the course of the trading day. The EIA report showed modest decreases in crude and gasoline supplies (810,000 and 39,000 barrels, respectively), but an increase in distillate stockpiles (1.1 million barrels), which include heating oil. The declines in gasoline and crude stocks were not enough to allay concerns that economic recovery will continue to move at a snail’s pace in the US and keep a lid on demand for petroleum products. The build in distillate stocks will likely keep retail heating oil prices flat tomorrow.
Today’s Closing Prices on the NYMEX
Crude oil (September 2010 contract): Down 0.5 percent, $75.42 a barrel
Heating oil (September 2010 contract): Down 0.1 percent
Afternoon Price Check, August 17: Rising Oil Prices Bring Midday Heating Oil Price Change of +4¢
Gains on US stock markets translated to higher crude oil prices on Tuesday. (image: ft.com)
Surging stock markets and a weak US dollar were the leading causes of crude and heating oil both posting moderate gains over the course of Tuesday’s trade. Led by stronger-than-expected earnings reports from Wal-Mart and Home Depot, US stock indexes rose, supporting hopes that economic recovery will pick up soon. Increased economic activity means increased demand for petroleum products, so stock market gains stimulated interest in crude and heating oil futures contracts. As market prices rose today, heating oil wholesalers around the Northeast increased prices by 4 cents per gallon.
The American Petroleum Institute (API) will release weekly data on US inventories of petroleum products later today. Unless the data shows big decreases in heating oil or crude stockpiles, the four-cent-per-gallon increase in retail heating oil prices will likely remain unchanged tomorrow. The Energy Information Administration (EIA) will release its own inventory report tomorrow, which is widely regarded as more accurate than the API data. The EIA report will likely be the main determinant of oil prices tomorrow, especially considering last week’s extremely bearish data that helped extend oil’s losing streak.
Today’s Closing Prices on the NYMEX
Crude oil (September 2010 contract): Up 0.7 percent, $75.77 a barrel
Heating oil (September 2010 contract): Up 1.8 percent
Souvenir-Seeking Oil Trading Group Fined $12 Million for Illegal Trade
A commodities trading group seeking the shiny first-ever $100-per-barrel crude oil contract disrupted the market in 2008 and is now paying for it. (image: proactiveinvestors.com.au)
First prints can be valuable collectors items. First editions of classic books can fetch several thousand dollars, and first prints of certain works of art can be worth much more. Apparently, first prints of oil futures contracts can also be attractive collectors items. The Wall Street Journal reported on Tuesday on a $15 million fine levied against an oil trading group for illegal trades it made in pursuit of the very first $100-per-barrel crude oil future contract in 2008.
The CFTC filed and immediately settled charges against ConAgra Trade Group, the former commodities trading division of mega corporation ConAgra Foods for causing a “non-bona fide price” on the New York Mercantile Exchange oil market on January 2, 2008. According to the CFTC, the NYMEX floor trader for ConAgra had been directed by his superiors to buy the first $100 oil contract for a full three months before the transaction took place. On January 2, the price of crude was rising toward the $100 level, with the electronic price at $99.60 and trading floor prices around $99.90. To ensure winning the golden ticket that was the first $100 contract, the ConAgra trader proceeded to buy up all of the available contracts at $99.90 a barrel, which prompted an offer from a seller at $100 a barrel. The sudden snapping-up of contracts at $99.90 disrupted the oil market, causing widespread confusion over the “true” price of crude and leading another NYMEX floor broker to file a complaint that he was offering the contract at a lower price.
The disarray the action set off on the oil markets was apparently of little concern to ConAgra, which was obviously focused on the prize of a freshly-minted $100 oil contract. According to the CFTC, a ConAgra trader boasted in an email, “some people collect art prints, we collect price prints.” The ConAgra Trade Group no longer exists, as it was sold off to hedge fund Ospraie Management for $2.8 billion in June of 2008, and now operates as the Gavilon Group.
While the incident’s effect on oil prices was short-lived and had little to do with the price of crude reaching its all-time peak of $147 six months later, it offers a glimpse into the reckless mentality of certain commodities investors. ConAgra Trade Group was so fixated on gaining a shimmering business souvenir, that its management and traders did not care how their efforts to secure the contract would affect other hedgers and investors in crude. In theory, ConAgra’s off-the-cuff crusade may have caused an end-user of crude oil to pay hundreds of thousands or even millions of dollars more for oil that it purchased on the day in question.
Certainly, the fine levied against the trading group for its selfish and irresponsible actions is a sign that the CFTC is taking on a more active role in enforcing trading regulations and clamping down on self-serving actions in the commodities markets that result in artificially high prices or other disruptions to the free market. But if one company was willing to cause temporary chaos on the oil market just to get its hands on a collectors’ item, chances are that a $15 million fine (chump change by Wall Street standards) won’t do much to deter a like-minded company from taking similar action in the future.
Afternoon Price Check, August 16: New Economic Data Keep Oil Prices Sliding
The price of crude fell for a fifth consecutive day at the NYMEX. (image: ft.com)
Last week’s pessimism about the future of global oil demand carried over into today’s trading, which ended with both crude and heating oil prices slightly lower than their opening marks. A weaker dollar gave oil prices some support at the NYMEX today, but that support was outweighed by mixed economic news from Japan, now the world’s third-largest consumer of crude oil, and flat stock markets in the US. Flat or falling stock markets and lingering doubts about when demand for oil will begin to pick up in the US and the rest of the developed world will likely continue to weigh down prices. As stated by the Wall Street Journal, “some market watchers say oil prices could continue to drop with further worrisome economic data.”
Today’s Closing Prices on the NYMEX
Crude oil (September 2010 contract): Down 0.2 percent, $75.24 a barrel
Heating oil (September 2010 contract): Down 0.4 percent
Oil Market Analyst Sees Crude Prices Falling Below $60
The price of crude oil on the NYMEX as been following the S&P 500 stock index closely since May of this year, and the S&P is set for a big fall, according to analyst Wayne A. Corbitt. (image: seekingalpha.com)
The financial world is full of professionals who predict oil prices. Some focus on supply and demand, others focus on geopolitical factors, and others base their predictions on patters, correlations, or other mathematical clues.
An oil price prediction published on the financial blog Seeking Alpha on Friday used this third type of analysis, generally referred to as technical analysis, to predict that the price of crude oil will soon drop below $60 a barrel. The prediction, from market technician and analyst Wayne A. Corbitt, looks closely at the strong correlation between crude oil prices and the US stock market, as represented by the S&P 500 index. Corbitt illustrates that crude oil (West Texas Intermediate, or WTI grade crude oil) prices and the S&P have been moving more-or-less in tandem since August 2008 and concludes that recent declines on the stock market will soon lead oil prices lower. He also declares,
crude oil has been tracking very closely with equities for the last two years and is being controlled only by traders and investors seeking risk.
This evaluation clearly falls in line with observations by HeatingOil.com and others that fundamental factors like supply and demand have less influence over oil prices now than perhaps ever before. Instead, stock markets, the value of the dollar, and other financial considerations seem to be the more influential determinants of oil prices.
Corbitt also based his prediction on recent patters within the oil market, specifically open interest (the number of open contracts—contracts that can be re-sold—held by traders) and volume (total trading activity). He showed that open interest in the crude oil market has been declining steadily since oil hit its nine-month low in May of this year, meaning that traders’ interest in crude oil has been falling for the last four months. As fewer traders buy crude contracts, demand for the contracts declines and price increases, especially in the form of rallies, become less likely. Looking at crude’s trading volume, he noticed a downward trend since May and interpreted that as a sign of prices dropping in the near future. In his words,
When volume is in an obvious decline as prices advance, however, that is a sign once again that the necessary support structure for higher prices is absent, thus opening the door for sellers to take control.
In conclusion, Corbitt chalks up recent increases in oil prices to outside (non-fundamental) factors, writing, “Crude oil’s inability to trade on its own merits has no doubt helped sustain its higher price level.” With oil prices’ tendency to follow stock prices, and expectations of stock market declines to come soon, the product of Corbitt’s analysis is an outlook that includes falling crude oil prices in the near to medium term. According to his vision, the per-barrel price for crude will dip below $60 well before surpassing $100.
As with all oil price predictions, the accuracy of the one described here is impossible to pin down. That being said, Corbitt’s simple and direct analysis (supported by fairly straightforward charts) makes a compelling case. His technical analysis also gets support from fundamental factors: a weak US economy is keeping down demand for petroleum products, and fuel supplies (including heating oil) are at record-high levels. If he’s right, and crude prices fall below $60 in the next month or two, that would go a long way toward knocking five cents per gallon or more off of current retail hating oil prices right as the heating season kicks off.
Afternoon Price Check, August 13: Oil Prices Fall for Fourth Consecutive Day
The price of crude faked up, then went down on the NYMEX today. (image: ft.com)
Crude and heating oil prices staged a rally this morning, and for a while it looked like oil’s three-day losing streak might be over. The rally was motivated largely by US retail statistics, which showed an increase in July sales. But closer examination of the numbers showed that the increase was mostly due to an uptick in car and gasoline sales, and the oil price rallies lost steam. With American consumers doing little buying, the chances of an economic recovery gaining momentum remain slim. With this in mind, as well as the host of bearish news that emerged this week, traders held off of oil buying in the later part of the day and crude and heating oil both closed slightly lower.
Today’s Closing Prices on the NYMEX
Crude oil (September 2010 contract): Down 0.4 percent, $75.43 a barrel
Heating oil (September 2010 contract): Down 0.2 percent
