Conclusion: A myriad of bad news today has taken the price of oil out to the woodshed, though it still has not violated our key support lines.
Position: Sold OIL yesterday.
While we didn’t have an expert network to advise us, we sold OIL in the Virtual Portfolio yesterday and it was obviously a fortuitous call given today’s action. Front month oil futures for WTI are down almost 5% currently and trading was halted earlier due to the volatility in trading. As Keith wrote yesterday when selling the position:
“I have no idea what centrally planned idea is coming down the pike next, so I'll sell here.”
Today, it seems, we know exactly what has come down the pike, which is that the CME, who owns the NYMEX, is increasing margin requirements by 25% at the close today. Obviously, as we are seeing today, this is not good for the price of oil. As investors, hedgers, and speculators are forced to either fund margin accounts, or reduce their positions, this obviously creates selling pressure.
To add to the adjustment of margin requirements, inventory levels released from the Department of Energy today were very bearish for the second week in a row. Specifically, crude inventories rose by 3.8 million barrels week-over-week, which is 2.2% above year ago levels. In addition, gasoline stocks were up 1.3 million barrels week-over-week. This broad increase of inventory was underscored by clear demand destruction as consumption of motor dropped 1.3% last week, which is the lowest level since the week ended February 11th. In the charts below, we show an increasing trend of oil inventory building in the United States.
Additionally, while emerging market demand still seems solid, Chinese growth of oil imports did show more tepid year-over-year growth with the April import data. Over the course of the past year, the average monthly year-over-year growth for Chinese oil imports is 10.7%. In April, and admittedly this is only one month, imports were up only 1.7% year-over-year, which is a deceleration from the prior three months and certainly a cautious flag.
The other important factor to consider today is the relative strength of the U.S. dollar, especially versus the Euro. Currently, the Euro is down roughly -1.5% in today’s trading versus the U.S. dollar and the U.S. dollar Index is up nearly a full percent. The value of the U.S. dollar continues to be the key driver of the commodity complex, in particular oil. In fact, as of last night’s close the correlation between the U.S. dollar and front month crude futures was -0.86 on a six-month basis.
In the chart below, we’ve highlighted our quantitative levels for oil. The TREND line is $98.63, which is an important support level. The next level is longer term TAIL line, which is $86.79. Based on our quantitative models, a sustained violation of the TREND line, typically three days, would put the TAIL line in play, which is more than 12% downside from here.
Daryl G. Jones