Oil Market Outlook: Saudi Arabia: Don't Worry - Be Happy

Crude oil futures were trading near $47 in pre U.S. trading after a greater than expected buildup of supply was announced by the Energy Information agency. The American Petroleum Institute reported a smaller buildup. But both figures were above the 1-2 million barrel pre-release estimate.

With the oil market, there is almost never any correlation between expectations and reality. So the fact that the market missed on the estimates is not the issue. What's important is how far the estimates were from the reports. The EIA reported a buildup of over 4 million barrels of crude, and the API reported a buildup of 2.5 million barrels.

Meanwhile, the Saudi spin continues to tell the markets that there is plenty of oil to be had. According to Al-Jazeera.com: Saudi Arabian Oil Minister Al-Naimi, at a Washington conference, told the crowd: ["I stand here to tell you that Saudi Arabian reserves are plentiful, and we stand ready to raise output as the market dictates. Very high or unstable prices are not in the interest of producers," he said. Mr. Naimi added that oil producers also suffer when the world economy slows.]

The "don't worry, be happy" message, along with official figures showing larger than expected buildups in supply, are for now dampening oil prices.

Still, there is no certainty, other than the market will fluctuate. The big picture in oil remains technical, with the key are remaining the 200 day moving average, which is near $47, and near which crude futures for June are now trading. Further out, in September and December, the futures are still trading at higher prices, suggesting that over the longer term, the market is still betting on higher prices.

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 in June, though, 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) again 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.

In the Rigzone Store:

Successful Energy Sector Investing: Every Investor's Complete Guide

Dr. Duarte's book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.