Oil Market Outlook: Supply Data Once Again Key to Prices

Expect the usual volatility in the oil markets today.

Traders are expecting a buildup of crude oil and gasoline in the latest supply reports, due out at 10:30 Eastern Time from the American Petroleum Institute and the U.S. Energy Information Agency.

According to Bloomberg: "Inventories probably gained another 1 million barrels last week, according to the median forecast from a Bloomberg survey of 17 analysts. Gasoline inventories probably rose 980,000 barrels last week from 213.7 million barrels the prior week, according to the median forecast. Inventories in last week's report were 3.2 percent above the five-year average, according to the department."

The U.S. is well supplied in crude, with large buildups of stock having occurred over the last 13 weeks. The problem remains with the constraints on refining capacity.

Oil stocks and crude prices have stabilized. June crude futures were trading above $49 in pre U.S. electronic trading. Falling oil stocks are usually a good forecaster of the future general trend in energy. Of course that could change. But for now, the charts are clearly on a downward path, despite looking as if they are ready to bounce. The Amex Oil Index broke below the key 800 support line, and the Philadelphia Oil Service Index closed below 130. See charts below for more details.

The big picture in oil remains technical, with the key are remaining the 200 day moving average, which is near $47, and above which crude futures stopped falling on Friday.

The 200 day line is not a perfect indicator. Indeed, what we expect is a lot of bouncing around near this level for at least a few days. We could even see a snap back rally from the area that could be very convincing and could take prices back above $50. If there is such a rally, though, the most important thing is to see how it resolves.

A break below the 200 day moving average could take oil prices to $40.

History shows that oil moves on supply, not demand. And supply, as of last week was at 10% above the levels at the same time in 2004, the major factor upon which the markets seized to accelerate the recent down trend.

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 Philadelphia Oil Service Index (OSX) closed below the 130 area, again stopping just at its key 200 day moving average. 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) stopped falling, but looks headed to the 740 area, its 200 day moving average, although a bounce is possible.

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