It’s a brave assumption — what with Merrill Lynch’s call for $25 per barrel crude in 2009 — but could crude have bottomed for the time being? The indicators are looking good. At least that’s the opinion of a number of analysts.
Firstly and most significantly, Wednesday saw a major flattening of of the ‘super contango’ (note chart below). This comes on the likely recommendation by, err, Goldman Sachs to sell the back-end of the curve. However, according to Olivier Jakob of Petromatrix, if the Bears are turning into selling the back of the curve it means the front is getting closer to a bottom. As he explains:
At Petromatrix we keep an old-fashioned read on spreads and we will not twist our interpretation into reading a tightening of the curve as a sign of structural weakness. A short position on the nearby month prints money each month on the contract roll and if the Bears would rather sell the back of the curve than being short the front and receiving the contango roll yield it will be because they don’t see enough flat price downside potential at the front of the curve.
The view from Robin Bieber, technical analyst at PVM, is equally optimistic. He explains that as we get increasingly used to ghastly economic data, the fact that cars still need petrol will be remembered by the market (our emphasis).
The market action looks like there’s some pent up energy, and this is likely to manifest itself to the upside. We are still in the middle of a conflict at the M/As. They, once again, effectively stopped much of the upside potential yesterday. The crudes both popped over the 5 day and had a go at the 8, but failed. They closed over the 5, which is gently positive. Heat and Gasoil look poor, and below all the M/As, with the nearest being the 5 around 143.89 and 448.00. RBOB, however, is above the 5 and 8s at the moment, with the latter being at 97.78. If it stays this way it may well be giving yet another of its very good early warning signals – i.e. there’s some upside potential here.
With the crudes and RBOB all seriously testing the 8 dayM/As and an OPEC meeting looming I would not bet on a failure here – quite the opposite. Add to this the fact that the stochastics are moving positive with considerable bullish divergence and we’ve got the technical ingredients for a rally.
This is enhanced by the point that I made earlier about we’re getting a bit used to the bad news. The three main contracts – the crudes and RBOB – are all holding support well. This, on the crudes, is the Gulf War One highs at 41.15 WTI and 40.90 Brent. The latter held well on the weakness yesterday. Furthermore, RBOB’s support at 94.10 is still solid and holding. So long as these supports hold the market is safe from further downside deterioration – but they must hold, so watch them on any weakness.
Bieber says that while any close below $41.15 per barrel on WTI and $40.90 per barrel on Brent would change his outlook, in the meantime, the market is finding its feet and even looks like pushing higher. Just for context, Bieber very successfully called the top of the market in July.
Stephen Schork of the Schork report, meanwhile, maintains his bearish bias, but says he is of the opinion the market has found a range in between the low $40s on the bottom and the mid $50s on the high end. His advice:
Until we get a break, offers at the low are to be lifted and bids at the high are to be hit.
Other supportive indicators include increasing expectations that Opec will cut supply by at least 1-1.5m barrels when it meets in Oran, Algeria on Dec 17th.