$50 Still Holding But Supply Questions Buoy Market

Oil is in no man's land, as conflicting reports swing the market back and forth.

The key trading range for the June contract is between $47.11 and $54.29, where the 200 day and the 50 day moving averages provide support and resistance respectively.

Supply data released on Wednesday painted a picture of building inventories for crude oil, but some traders interpreted the data as showing a decrease in the rate of the buildup, thus prices moved higher.

But, as questions rise about Venezuela's oil production, the market could start building up for another short term up leg.

There is also a potential for a rise in the terror premium creeping back into prices, as the U.N. nuclear proliferation conference, the overnight explosion in New York, and the potential for rising tensions between the U.S. and Iran could be on the rise.

The bottom line is that oil has had a $8 correction in the past few weeks, and that if there was going to be a retracement to the up side, now would be a good time.

At the same time, though, the action in oil stocks, often a predictor of the action in crude, is not particularly stout right now, although this could also be stabilizing.

This remains a technical market which will be moved mostly by supply data and developments in external events. If crude falls below the $45-$48 area, a move to $40 is possible. The next question is whether such a move would be temporary or just merely a correction in a long term bull market.

History shows that oil moves on supply, not demand. And at this point, there is plenty of supply, with more coming, if Iraq continues to improve its security and production. Recent reports show that Iraq's production is now more than it was last year at this time. If that trend remains in place, and countries like Libya continue to upgrade their infrastructure, we could see lower, or at least steady prices over the next 12-18 months, assuming that there are no catastrophic events along the way.

The caveat is what could happen if Venezuela is running dry.

Still, until the 200 day moving averages on futures contracts get taken out convincingly, we remain in a long term up trend in oil, and in our opinion, we are not very likely to see oil below $40 per barrel for some time, unless something very dramatic happens, such as a collapse of the Chinese economy, which as we've stated numerous times (see our archived IQ reports) is a plausible scenario.

Investors should remain wary of the oil market, and should use extreme caution in any exposure there. Aggressive traders should be looking to go both short and long at this point depending on the individual circumstances of each position.

The Amex Oil Index (XOI) is attempting to recover. The index could be headed for the 750 area in a hurry.

The Philadelphia Oil Service Index (OSX) is still testing the 130 area, an increasingly important chart point of late. 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 above 800. The index could be headed for the 750 area in a hurry, if it breaks below 800.

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