Firm's Oil comments

Crude Oil Weekly Report

Oil was a flat line as the market got pulled in different directions on a confusing mix of market fundamentals. Once again the Chinese are calling for a global currency so they can loosen their dependence on the dollar and talk of more big purchases of oil yet at the same time we have Bank of China Governor Zhou Xiaochuan playing down dollar worries by saying that China’s foreign exchange reserve policy is stable. That kind of talk may give the dollar a boost but the other key question for the oil market is whether or not the Chinese are going to continue their recent strong buying in oil.

Well the answer to that question is probably yes. Over the weekend it was reported that China plans to increase strategic crude oil reserves by 60 percent to 270 million barrels during the next five years by the Nikkei English News citing an unidentified official from China’s National Energy Administration. According to the report China will spend 30 billion yuan ($4.39 billion) for stockpiling facilities with a capacity to hold 169 million barrels. China Petrochemical Corp., China National Petroleum Corp. and other companies will construct and use the storage sites. If China continues to strengthen its reserve then oil will be bought on pullbacks. This should help provide some long term support.

Technicals: Because this is our initial piece on Oil, we decided to show a broader view of the USO (United States Oil Fund, LP) – our proxy ETF for the general crude contract. For the most part, the chart above represents a huge rounding type bottom. Notice the heavy volume at the trough – this is showing the type of volatile activity where money moves from weak hands to strong hands. This is most likely representative of oil bulls finally giving up after buying at much higher prices and new investors popping in feeling that oil was undervalued. Over short term, USO may linger but should eventually retest the $40 region and eclipse that to target the $55/$60 region over the more intermediate term.

posted by Peter Greene