More New Highs on Crude With No Rally in Energy Stocks

The beat goes on in the crude oil markets. Crude oil futures prices in pre U.S. trading were above $41.70 on 5-20. Gasoline futures closed at new highs on 5-19, trading at $1.45 per gallon.

The commodity rally continued on 5-19, as gasoline inventories grew less than the 1.5-2 million gallons most were expecting, while crude supplies contracted. According to CBS Marketwatch: "the Energy Department reported a 1.2 million-barrel increase in motor gasoline inventories for the week ended May 14. Total stocks stand at 203.7 million barrels, or 2 percent below that of a year ago. The American Petroleum Institute said supplies rose 2.1 million barrels to a total of 196.3 million for the week. Data on crude inventories from the Energy Department and API differed, but the changes were modest. The Energy Department said crude fell by 1.1 million barrels to a level of 298.9 million barrels, while the API pegged the drop in supplies at 1 million barrels, to total 299.1 million. Crude inventories are 4 percent above the year-ago level, according to the government's figures."

Otherwise, nothing changed. Oil and oil service stocks fell while the price of crude went higher, worsening the technical divergence we have highlighted for some time. We still adhere to the notion that crude prices could continue to rise, but that eventually, unless the stocks join the rally, the price of crude oil will fall. When, and how that happens is still to be determined. But history suggests that rather than a slow gradual decline, we are more likely to see a sharp break in crude and a subsequent slide.

A sustained break below $40 will almost certainly take crude prices to the $36-38 area. What happens there will set the scene for what's next.

There were no major oil headlines in the Washington Post or the New York Times on 5-20. But according to "Oil ministers from the 11-nation group will discuss the proposal to raise the OPEC limit by at least 1.5 million barrels a day, or 6.4 percent, at an oil forum this weekend in Amsterdam, President Purnomo Yusgiantoro said. OPEC states including Kuwait, Qatar, Iran and Indonesia have backed the Saudi plan."

The Philadelphia Oil Service Index (OSX) is still trading below 100, 10% off of its recent highs and barely moved on 5-20, despite new highs on crude. The index is above its 200 day moving average, but is clearly diverging from the price of crude and predicting some kind of pull back in the market. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.

The Amex Oil Index (XOI) closed below 600 and its 50 day moving average on 5-19. XOI has still to confirm the commodity record price, creating a technical divergence. This is still a crucial juncture for the entire oil sector, as a continued failure in the near term could lead to a major top forming. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.

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