Crude Futures Log Further Large Declines

July 9, 2009

Crude futures are continuing their brisk decline on rising volume today, entering the heavy-handed $60-$61/bbl zone we mentioned in our previous analysis.  Crude’s declines are feeding off of quite a few fuels, the foremost being a report from OPEC saying they don’t expect crude consumption to reach 2008 levels until 2013.  OPEC’s prediction manages to provide a starker image than the IEA’s estimation last week of 2011-2012.  Altogether, both OPEC and the IEA are indicating that the demand side of crude will likely take years to repair and restore to previous levels.  Not only are we witnessing a drop-off in global production and manufacturing due to higher unemployment and lower consumption, but the U.S. and China are enacting aggressive policies to decrease their reliance on fossil fuels.  Therefore, there are several factors impacting the demand side of crude.  Weekly crude inventories came in just shallow of analyst expectations, but failed to have a positive impact on price yet again.  Hence, fear of deterioration on the demand side of the equation is overpowering the consistent decline in U.S. stockpiles.

Meanwhile, crude is finding intra-day support in the $60-$61/bbl range as we anticipated, yet failed to stay above our 2nd tier uptrend line, a negative sign technically-speaking.  Despite the intra-day stabilization, there continues to be a considerable downward pressure on price.  Therefore, we could be in for a messy earnings season.  If this is so, the $58-$61/bbl range may only last a week or so.   Corporate earnings and 3rd quarter outlook should be a driving force for the near-term performance of crude and equities.  If corporations project lower earnings, this implies a decline in production, manufacturing, and consequently overall consumption of crude.  On the flipside, should corporations provide a rosy outlook for the upcoming quarter, crude futures could bottom and begin to rebound substantially.  We can tell you crude futures are in a very vulnerable position, and the near-term potential remains for a more protracted selloff.  The question becomes whether this is the worst if it, or just the beginning of a path towards a retest of the lows?  We will closely monitor the developing situation.

Present Price: $60.10/bbl

Resistances: $60.25/bbl, $60.73/bbl, $61.26/bbl, $61.66/bbl, $62.16/bbl

Supports: $59.69/bbl, $59.17/bbl, $58.90/bbl, $58.55/bbl, $57.87/bbl

Psychological: $60/bbl

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