A New Rally Has Begun

On March 6, 2013 by TradingDesk
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Energy prices bounced off of technical support Tuesday, and rallied 2-3 cents/gallon in the morning. The rally picked up steam in the afternoon as the DJIA pushed to a record high, and on late news that Venezuelan President Hugo Chavez died. The situation in the country with the world’s largest proven oil reserves (and the 4th largest importer of crude to the US) merits watching, but unless disorder erupts, it is unlikely that the news will push energy markets higher. In fact, there is an argument that a regime change could be bearish for energy prices, as Chavez’s nationalization policies have crippled its domestic crude production and refining industries, which has forced the resource-rich country into the role of a net importer of refined products, most coming from the US gulf coast, since the international experts in the industry were unable to work under the oppressive conditions.

Now that the new rally has begun in energy prices, watch $3.17 for RBOB and $3 for HO as the first layer of technical resistance. If we are unable to get back above those levels, it will appear that this week’s gains are simply a reaction to the oversold condition caused by last week’s meltdown, rather than the next leg of the 2013 rally. If prices do break these levels however, the argument that the spring rally is just beginning remains.

A major winter storm which dropped record amounts of snow on Chicago has now descended onto Washington DC. At this point, the DOE has not announced a delay in its weekly report, but other economic data has been pushed back. There are no reports of issues with energy supply infrastructure due to the storm, but demand is likely to take another hit as roads close.

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Record Highs Ahead?

On March 5, 2013 by TradingDesk
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China’s outgoing premiere said the nation was committed to 7.5% growth in 2013, which cheered markets that had begun to worry about recent economic readings in the world’s engine for growth. The speech, presumably due to a veiled hint at more stimulus from the PBOC, is lifting global equity and commodity markets this morning. The Dow Jones Industrial Average is set to open trading at a record high, and Brent crude is rallying nearly $1/barrel after 5 straight days of losses.

HO is leading the push higher this morning, gaining 1% as it bounces off of its December lows at $2.90 alleviating a deeply oversold condition. Diesel futures need to break back above $3 to have a chance of recovering from the late February meltdown. RBOB meanwhile continues – barely – to hold support at its bullish trend line, and must break back above the February highs at $3.16 to resume the rally. Although some have already called a top in the gasoline market for 2013, following a 30 cent drop over the past week, there is a risk (if support continues to hold) that we play out like in 2011 when the market rallied 50 cents to start the year, dropped sharply for 2 weeks in March, only to recover and rally another 50 cents before peaking in May a full dollar/gallon higher than where the rally began. If that pattern develops, RBOB would top out in the $3.60 range, threatening its all-time high.

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Energy Futures Modestly Higher

On March 4, 2013 by TradingDesk
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Energy futures are moving modestly higher this morning, following a platform leak in the North Sea forced a shutdown of a Brent crude pipeline and halted some exports from the area. The supply concerns are enough so far to offset financial concerns of forced spending cuts in the US, and a Chinese central bank that is trying to curb inflation. While product prices are less than a penny at the moment, charts do suggest a short-covering rally could pick up speed this morning as HO values remain deeply in oversold territory, and RBOB values were unable to settle below their 3-month old trend line, that has supported the 2013 bull market. (While I wrote that sentence, RBOB prices just rose by another penny.)

Friday’s commitment of traders report confirms what was suspected by many during last week’s relentless selloff. Non-commercial (aka speculative) long positions were being rapidly liquidated. The chart below shows the change in HO positions held by the group that includes hedge funds and money managers. What should be noted is that while RBOB also had a drop in its speculative long position, it remains near its highest level ever for this time of year. The question is whether this means gasoline prices have much further to fall if the hot money heads for the exits, or if we are simply captives of the “massive passive” amount of investment funds that people want to hold in commodities rather than traditional equity and debt vehicles.

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Signs of Energy Being Oversold Could Stage A Short Term Bounce In Prices

On March 1, 2013 by TradingDesk
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Energy markets are ending a remarkable week with another round of selling, in sympathy with falling global stock markets weakened by a toxic cocktail of weak manufacturing data in Europe and China, mixed with budget cuts in the US due to kick in tonight. The EUR/USD has broken below 1.30 for the first time since mid-December, while Italian bonds are pushing to multi-month highs adding to the negative sentiment.

RBOB futures are now trading below the trend line which started at December’s low print of $2.76, which sets up a test of the $3 mark, while HO has collapsed below all near term support levels with only the December low at $2.89 standing in the way of another 10% drop. While technical studies have completely reversed over the past two weeks and now favor lower prices, signs of being “oversold” are starting to show up in both refined products suggesting a short term bounce in prices may be coming.

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