Crude Oil Consolidation Continues Future Prices Tipped Higher

Sponsor Links

Prices of crude oil continue to consolidate between $86.67 and $89.20, the 38.2% and 14.6% Fibonacci retracements of the 11/17-12/7 upswing, respectively. A break below current support exposes the 50% Fib at $85.41. Alternatively, a push higher targets December’s swing high at $90.76.

Crude oil is up to kick off the new week, as the commodity stays firmly inside its recent $87 to $90 consolidation range. Last week crude was essentially flat, at least when looking at WTI, the U.S. benchmark. As we wrote about last week, WTI remains depressed due to a persistent glut at the NYMEX delivery point, Cushing, Oklahoma. We saw UK Brent rally about $1 to nearly $92, while LLS gained about $0.60 to $93.50. As we get the typical winter draw in crude stocks (specifically at Cushing), we should see those spreads tighten and WTI may then join the other crudes in the $90’s. But even if spreads remain wide, oil in general remains supported by bullish fundamentals with triple digit pricing now a distinct possibility for 2011. The two factors that will determine how high crude goes are OPEC supply and global demand growth. The IEA expects growth of 1.4 million barrels per day next year, but keep in mind that their initial projections for growth for this year were way off and were subsequently revised higher.

Crude-oil futures tipped higher Friday, overcoming drags from a stronger U.S. dollar and weaker U.S. equities. “I think it’s probably a bit of position-taking before the weekend in the case the weather outlook turns colder,” said Matt Smith, commodities analyst at Summit Energy in Louisville, Kentucky. Oil for January delivery rose 25 cents, or 0.3%, to $87.97 a barrel. Natural gas also tipped higher, to $4.05 per million British thermal units, after a sharp sell-off in the prior session on disappointment over weekly supply-draws and a higher estimate from the U.S. government on its outlook for natural gas production.

Charles Maxwell, a senior energy analyst at Weeden & Co., discusses the outlook for energy prices. Maxwell, speaking with Tom Keene on Bloomberg Television’s “Surveillance Midday,” also discusses natural gas prices and the outlook for Cenovus Energy Inc.

Crude oil, trading near the highest levels in two years, is likely to “break out” toward $94 a barrel if prices hold above $87 support, according to Chart Partners Group Ltd.

Commodities like oil, gold and copper are showing bullish short-term trends going into January, even as they “flirt” with an “opposing, corrective cycle” in the longer term, said Thomas Schroeder, managing director at Chart Partners, a Bangkok-based technical research company. The $87-a-barrel level is a pivot point and was the high for the year a few months ago, Schroeder said. Crude futures settled above $87 a barrel three times in November before rallying above $88 a barrel in December.

“It’s popped above $87, it came back down and had a hard fall, went back above $87. It’s having a hard time deciding whether it wants to hold that level,” said Schroeder. “As long as the $87 support holds, I think we’ll have some more significant highs in January to deal with.”

Crude for January delivery gained as much as 48 cents, or 0.6 percent to $88.50 a barrel in electronic trading on the New York Mercantile Exchange and was at $88.36 a barrel at 8:46 a.m. Singapore time. Prior to November, futures last settled above $87 a barrel in October 2008.

A rally for oil next month will be its “last run of strength before a pending down-cycle unfolds,” according to Schroeder. Crude’s chart is also showing bear divergence, where peaks in the Relative Strength Index and Moving Average Convergence/Divergence indicators aren’t getting progressively higher, unlike oil’s upward price trend, he said.

“Indicators haven’t been confirming new highs, so that means crude’s on unsure footing, the rally is on limited time,” Schroeder said. “That usually means everybody’s sort of long, everybody’s waiting for somebody else to buy and nobody else does. That’s an underlying weak signal that I think will start to come through in January.”

Oil prices hovered above $88 a barrel Monday in Asia amid light trading volume ahead of the Christmas holiday.

Benchmark oil for January delivery was up 19 cents to $88.21 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. The contract rose 34 cents to settle at $88.02 on Friday.

Many oil traders are taking the next two weeks off amid the year-end holidays. Global crude markets are closed Friday for Christmas.

Analysts are mulling whether this year’s strong global oil demand can carry over into 2011. Emerging markets, led by China, have accounted for most of the growth in oil consumption this year as the U.S. and Europe slowly recover from recession.

“The positive demand shock has continued relentlessly,” Barclays Capital said in a report. Prices will likely rise “given the strength in underlying fundamentals and with macroeconomic sentiment continuing to improve.”

Barclays said it expects crude to average $91 a barrel next year.

Morgan Stanley, which is forecasting that oil will average $100 in 2011, said higher commodity prices could fuel inflation and undermine economic growth.

“If developed world growth accelerates next year, commodity prices, particularly oil, could become a headwind for growth, lift inflation, and prompt policy tightening, particularly in emerging market economies,” Morgan Stanley said in a report.