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December 2012

The New Era of Oil Renaissance

December 30, 2012 by EconMatters   Comments (0)

By EconMatters

Where Nuclear Failed, Oil Succeeded

In a continuation of our series on the state of the oil industry we look at some of the other ramifications of what we are labeling the Oil Renaissance in the US, and around the world for that matter.  This phrase was first proposed regarding the potential Nuclear turnaround here in the US, where companies like NRG Energy, Toshiba and many more players all along the supply chain were positioning themselves for the Nuclear Renaissance of cheap, and abundant Nuclear energy for the next 50 years.

Well, the natural disaster in Japan changed that movement in the span of a week of just untenable radioactivity readings coming out of Japan.  An already uphill battle for changing public sentiment towards the dangers of nuclear energy became an impractical fight from an investment standpoint that relied upon large DOE loan guarantees to attract private investment.

It is ironic, but all these companies spent a lot of time and effort from lobbying to developing strategic partnerships with each other, and in the end, most of that 7 year effort had to be written off by firms. It really shows how firms have to get the industry right; Oil was so much the smarter play. Higher margins, better technology, much easier safety hurdles, and even the environmental fight is much more manageable.
Not to mention the number of jobs created is far more with an Oil Renaissance as opposed to a Nuclear Renaissance, even with a complete buildup of the entire nuclear supply chain. Nuclear projects are just not scalable like oil projects are from a numbers standpoint due to the regulation, lead times for components, inspection, build times, and many more constraints.
No DOE Loan Guarantees: The Free Market at Work

We are going to have a Renaissance in this country, it just happened under everyone`s nose. The free market of high oil prices for the last 10 years made it happen all on its own without government subsidies, and part of the reason that things are going to get real tough for the alternative energy folks over the next 5 years as those government subsidies wind down. They will not make sense from an economic standpoint once oil prices come down considerably, and from a budgetary perspective we can no longer afford this propping up industries that cannot sustain themselves on their own merit in the free market. A 16 trillion dollar debt and climbing means the environmentalists will now be facing an uphill fight on Capitol Hill to have their cause funded by the American taxpayer. 
Technology Changes: Heart Surgery meets the Oil Patch

The technology changes alone in the oil industry are amazing; just watch a horizontal drilling or fracking video and it is like all the advances made by the medical community for endoscopic procedures and advanced heart surgical techniques have been applied to the oil industry. And the cost is far more manageable than the medical field with all the added insurance costs, out of control bureaucracy, and government intervention all but eliminating any sense of free market principles.
Sure these constraints exist in the oil industry, but the healthcare industry is on a planet of its own and worse from a cost efficiency standpoint by a factor of at least a 100. There is not an ounce of free market in the healthcare industry!
Fracking Diagram
We haven`t seen anything yet as this new technology being refined and implemented here in the US will then be fully scalable around the globe, and the amount of new projects that will come online globally with this new technology over the next ten years has yet to be priced into any market intelligence models.
Natural Gas Industry as the Model

The natural gas industry is much smaller than the oil industry, and because of the new technology firms were actually continuing production with $2 natural gas because of much lower overall project costs relative to the size of the gas exploitable and other derivative products made along the way enabling  these projects to be profitable.
The oil industry is much more scalable from a cost standpoint, and once these upfront costs have been committed, the size of the industry and scalability means that projects can continue and be highly profitable even with much lower oil prices.
I previously have thought that this technology would suffer as prices drop, but I am rethinking this assumption with natural gas as my guide in a much less scalable industry. So I now believe that this technology and these projects will continue and be cost effective even with oil dropping to $45 a barrel for both Brent and WTI.
Slant & Horizontal Drilling
It won`t happen overnight, but under one scenario prices will just steadily trend down like natural gas prices, and before we realize it we have the equivalent of $2 natural gas prices for the oil industry.
The China Factor: Use less Commodities for Next Decade

My assumption about the trajectory of oil prices also relies on the China factor that many analysts have been toying with for the last couple of years, but the IMF and others have done some nice research on and applied some hard numbers to the conceptual idea that China has overinvested for the last decade by a large degree, and most of the previous forecasts for China`s growth trajectory from an infrastructure standpoint for the next 10 years are far too optimistic.
My conclusion is that China will use far less commodities than they did the past decade going forward for the next decade. They are coming into the constraints of large numbers where you have built for the sake of building, and you can no longer build another large new city every year because the demand just isn`t there. Basically, the easy, low hanging fruit has been eaten. Most of the new project benefits will not justify the cost based upon infrastructure constraints, logistical incongruities, and actual demand & societal need for said projects.
The societal costs outweigh the societal benefits and the projects evaluated in total become a net drag on growth and GDP in the overall calculus. China can go ahead with these projects but the law of diminishing returns, means the country will pay a heavy price to do so. China will continue to grow, but they will grow in a more sophisticated way from a social perspective from within, i.e. in a metaphorical Maslow`s – Hierarchy of Needs manner, and less of a brute, infrastructure driven manner.
Ergo, the lower utilization for commodities by China is another factor that will put downward pressure on Oil and other commodities over the next 5 to 10 years.
More Storage Capacity Needed Globally

Make no mistake these oil and commodity projects are going to go full stream regardless of price due to sunk costs, more efficient operations, job creation, and overall profitability.
One of the takeaways out of this analysis is that storage facilities will have to be upgraded and new ones coming online for all commodities. For example in Oil, my analysis concludes that Cushing will need to upgrade capacity to over 100 million in the next couple of years, and over 150 million by 5 years’ time.
My new analysis determines the need for even more pipelines being built out of Cushing as well. There will need to be at least 5 million barrels per day outflow from Cushing to refineries by five years’ time; can anyone say job creation opportunities here?
The next substantial upgrade besides the paltry 300,000 per/day upgrade this year will not come online until mid-2014 and only improve capacity to 850,000 barrels per/day outflow from Cushing which is not going to be enough to counter an exponential measure of domestic production coming into the Cushing energy hub by 2014.
But I am forecasting that not only will Cushing be above 100 million in storage in three years’ time, but the US will need capacity to store over 600 million barrels by four years’ time, and China who is building storage currently, will need to meet their own need for storage due to a massive oversupply in their country.
China was building storage initially for strategic purposes, but my analysis concludes that because of an oversupply issue similar to copper today in China, they are going to need this additional storage for excess supply issues.
 Therefore, if you’re in the storage facility business, times will be good for the next five years, plenty of business for these firms. As I think storage facilities will have to be built all around the world from Iraq, Saudi Arabia, Africa, and the Scandinavian countries.
A New Price Model for Oil

So how low can prices go? Let`s just say that the Renaissance in oil is going to be good for the global economy, just back in 2003 gasoline prices were $1.60 a gallon in the US and oil was trading around $30 a barrel.
It is not unreasonable to think if the Oil Renaissance takes the path that it is capable of that Oil globally trades all the way down to the $45 area.
What Price do the Saudi`s Really Need? Need & Want Confused

And those that think that OPEC would need $75 to keep up production, remember that OPEC still kept pumping oil only four years ago with $33 oil in 2008. Furthermore, OPEC countries still need the overall revenue not the price per say.
Accordingly, you could very easily have a scenario where prices go lower and they pump more, violate reduction quotas because they all want the revenue net of volume and price, not just less volume but slightly higher prices.
 I think the world will be surprised how the talking your book rhetoric of “we need $75 oil to justify production” is replaced with the actual, “we need the money and our real cost is so much lower than you could ever imagine” reality on the ground.
This is their one asset in these countries, some revenue stream is better than no revenue stream, and with global production picking up OPEC `s relevance, power, and influence on prices is diminishing by the day.
Great OPEC you can reduce production, your global competitors will love that, less competition for them. The only problem is that these countries need the money, every country needs the money these days, and that`s the market place you take what you can get on the market! The market goes in cycles, just as the housing market re-priced itself, so will the oil market!
The ironic point here is that often the lower prices go, the more oil that is produced trying to make up in volume for the lower price to get as much revenue as possible. 
$45 Oil & $2 Gasoline: Consumers Love this New Era

In conclusion, we are entering a new Renaissance in the oil market, not just in the US, but globally as well.
New technology, slower growth in the emerging markets over the next decade, and an era where a decade of high prices will finally bear some fruit with market dynamics working as their supposed to leading to more supply, and an eventual reduction in prices.
Expect this new era to manifest itself in giving the entire world a tax break, and small businesses and consumers worldwide will have more disposable income, and sectors such as retail, entertainment, transportation, and global travel will benefit as a result of this sea change in the oil industry.
I could even envision the manufacturing industry in the US getting a large piggyback effect as the US will have some of the cheapest energy costs of anywhere in the world for starting a business with an abundance of natural gas, oil and petroleum products for the next decade at a low and stable price.
How does $45 a barrel oil and $2 a gallon gas sound? Something the peak oil folks thought was an outright impossibility just 5 years ago.
But a lot of things can change real fast, once technology gets involved, impossible things become possible. Just look at smartphones versus 4 years ago, and the fact that I can deposit a check into my checking account via my smartphone, actually surf the net, get usable navigation directions, and watch Netflix movies on my smartphone.
The world history of scientific innovation being applied to markets is remarkable to say the least looking back, it’s now time for the oil market to have its second renaissance. Expect $45 oil in the future of this renaissance.

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Oil & Gasoline Markets End 2012 with Swollen Inventory Levels

December 29, 2012 by EconMatters   Comments (0)

By EconMatters

EIA Inventory Data

In analyzing the last EIA report of the year it is noteworthy that gasoline stocks really rose the last 5 weeks of the year. The takeaway isn`t so much that gasoline inventories rose 23 million barrels the last 5 weeks of the year, wow that is some build in inventories, but the fact that Oil inventories barely budged at all during the process.

Seasonal issues regarding tax selling in order to move as much oil through the system to avoid higher tax liabilities is primarily responsible for the higher run rates of refineries, and thus the build in gasoline inventories, but that should result in large drawdowns of oil as there is a push and pull between products and the base commodity oil. Yet we end the year slightly above the 370 million barrel mark in US oil inventories.
This is actually very bearish for oil because with these gasoline builds refineries are not going to want to keep adding more gas to storage as part of the reason refiners have done so much better with their margins is by keeping low inventory levels in the products so you have what appears to be a tight market.
Well, we no longer have a tight market in gasoline, so no need to draw as much crude to produce the end product. We should start to experience some rather substantial builds over the next couple of months in crude oil as refiners request less base commodity, and lower their run rates.
The Rise in Domestic Production

This occurrence really points to the rise in US domestic production as imports were fairly light during the last two months of the year, and we normally have substantial drawdowns with refinery run rates in the 90s, so something definitely worth paying attention to going forward into 2013.
Another point on imports and domestic production is that there is a very noticeable trend on the charts; imports have trended down after July, which is what one would expect after the summer driving season is coming to an end, but domestic production starts accelerating at a sharp right angle from July towards year-end.
So these are domestic projects that are strongly trending regardless of summer driving season demand, and unlike imports that are managed according to seasonal demand dynamics, i.e.,  Saudi Arabia pumps more or less depending upon the season, the domestic projects are just going full bore and on a production path to increase performance each and every month if possible.
This is something new to the market because we no longer have managed supply, just as Iraq is maximizing production right now because they need the revenue, well these domestic projects are just revenue based machines, and not being managed based upon supply and demand of the end market.  I will provide two charts to illustrate this interesting phenomenon.

The Demand Picture

Another point to be made is what is happening with gasoline demand, down in the wholesale sector 2.8 percent year-on-year. With GDP being better than expected, and most believing that the economy is stronger than it was last year, this could be related to better fuel efficient vehicles on average in the US consumer fleet as the car sales were pretty good the last two years, and maybe higher prices changing driving behaviors on a more permanent basis. 
The demand chart for 2012 can be explained by the run-up and actual summer driving season, with the inevitable falloff towards the end of the year. However, many analysts have forecast that the US being a mature country is going to trend down on a longer term basis from a demand standpoint, with most of the growth coming from emerging markets, but the year over year comparison is something worth paying attention to for 2013.
 If we have a repeat deceleration in demand at the end of 2013 year comparisons then further analysis will be needed to identify potential additional reasons for slowing demand in an economy that is seemingly strengthening with a stronger housing and employment market. 
Fundamentals versus Price

It would be great if Wall Street actually invested and traded based upon the fundamentals, but the oil markets have long since diverged from trading upon the fundamentals, especially in the short term, and are more ripe with “managing” price swings either through sophisticated algorithms, and “creative” fund flows than any notion of the fundamentals.
To put it non-euphemistically, basically the oil market has been rigged for years, like most markets to some extent, and is about as corrupt as it comes. All any bystander has to do is pull up a price ladder of bids and asks, known as a trading Dom, and watch all the large fake orders and other assorted order flow shenanigans used to manipulate price up and down the chart each day.
However, over the long term, the markets cannot stray too far from the fundamentals, for eventually the fundamentals take precedent over the trading shenanigans, especially if there is a definable, sustained trend in the fundamentals, and it appears that we are entering a new age where the world is going to have a five year period of abundant supply.
A New Era: Growing Economy with Lower Energy Prices

In fact, more supply than demand, even with a robust economy, because part of the reason the world economy will be doing so well is all the global enterprises out there producing oil. It’s a good business with very high margins when compared to many other industries with the past decade of higher prices.
Consequently, even if the US economy really takes off in 2013 as some have forecasted, don`t look for demand to overtake supply in the equation. The domestic oil renaissance means that we could have a booming economy, and still have more supply than we can use each day. Thus it is actually possible to have an era with a great economy, and even lower oil prices due to the domestic oil boom. 

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Cushing 50 Million, Boom & Busts Cycles, US Debt & Recession

December 28, 2012 by EconMatters   Comments (0)

Cushing Magic 50 Club

The final EIA Inventory report for 2012 is coming out on Friday, and according to the API report, Cushing inventories increased another 2.23 million barrels to a record 49.2 million. All this build in Cushing happened even as the Seaway pipeline began pumping crude from Cushing, Oklahoma to a major U.S. refining hub in Houston, Texas in May of 2012.

The problem here is that U.S. and Canadian oil production is increasing faster and producing more oil than Cushing can build extra storage or increase pipeline capacity, and or bring new pipeline projects online from Cushing to Houston.  Oil stored at Cushing basically jumped from 30 million barrels to 50 million barrels in 2012, an increase of 20 million barrels which is just an incredible feat, just imagine if there were no pipelines pumping oil to Houston in 2012. In fact, full capacity including shell capacity would have been completely filled to the gills, and Cushing would have to stop accepting oil into its facilities.
Goldman Sachs Forecasting Prowess

Goldman Sachs forecast that the spread between Brent and WTI would reduce to $4 at the beginning of 2013, they forecast this early in 2012, and have since backtracked from this forecast, but even their backtracking seems way off at this pace.
But you cannot take anything Goldman Sachs says about oil forecasting with any seriousness, given their past record on price predictions, remember the $200 oil price forecast, what Day Dreamers… the global economy would collapse long before it got to $200 as the entire global supply chain from China Manufacturing, to Country specific subsidies for its citizens rely on a certain price input to make their numbers work. Blow out that input cost by even 30%, and the proverbial recession starts hitting the fan, and something the Saudi`s have known for a while, you won`t be able to give oil away at $35 a barrel!
We have had paper recessions thanks to the actions of the Central Banks for the most part, but a true organic recession started by out of control input costs cannot be alleviated by any central bank planning, and that is what Goldman Sachs failed to realize. Once Oil gets too high, it effectively slits its own throat!
Holiday Pump Job & Speculators

The speculators are pushing oil up again over the past two weeks during thinly traded holiday market on low volume with the diehards trying to make their yearly numbers look better, but the fundamentals for WTI and Brent don`t bode well for 2013 with the North American production output putting downward pressure on WTI prices, and the expected increase in Oil production from Iraq, Kazakhstan, Sudan and others putting downward pressure on Brent prices.
Speculators have all but left the Gold and Silver markets towards the end of 2012, are the oil markets the next frontier where the easy bullish speculation dries up? Right now everyone and their uncle is in the weak Yen trade, but that speculation has already come along way, it is very crowded, and it wouldn`t be the first time that Japan fails to weaken their currency. How many times has this trade failed over the past 3 years?
US Austerity Only a Matter of Time

With the global economy basically being artificially supported by central bank policies, the real issue is of a global debt problem that is not getting any better, only worse, and is unsustainable. The global economy appears headed for another decade of deleveraging in a massive deflationary loop cycle that has only just begun for the most powerful consumer of Oil products in the world, namely the U.S. economy, as the United States has yet to take their austerity medicine, and that is the real elephant in the room.
When this finally happens expect WTI and Brent to be priced in the $45 a barrel range. As when the U.S. gets a cold, the entire global supply chain gets the flu! And with a 16 trillion dollar debt issue and climbing, that`s going to be one major austerity project, then the real deflationary loop kicks in.
The government cuts back spending, the economy goes into recession, china manufacturing recedes, oil and commodities contract, those resource laden economies go into recession, and the whole loop feeds back into itself, and you have a global recession of epic proportions. It`s just a question of when the United States can no longer kick the can down the road before the entire world is held hostage just like Europe over the U.S. version of an austerity mandated project.
Supply versus Demand

So in the short term they can build more storage facilities and more pipelines out of Cushing, but the North American production increases are always going to be more than the measures applied to alleviate this glut because the fundamentals of high oil prices in a 2% at best economic growth engine that is borrowing the future through artificial means of stimulation at the present just reinforces that the real issue is one of demand versus supply. At current prices there is going to continue to be more production coming online versus the demand to eat up that supply. Simple economic theory, and the solution is probably two-fold: a reduction in prices to increase demand, and ultimately, a cutback in production around the world.
Bear Cycle in Oil

There will be a major pullback in oil prices, we are presently already in the deflationary stage, but you haven`t seen anything yet, because we are increasing production (we currently produce more than we consume each day)  around the world as prices are real high relative to demand. What happens when the central bank stimulus stops being effective, and it stops altogether, and the debt issues are finally addressed? That is when the real recession takes hold, and the only solution then to massive oversupply is stopping production. The real question is who stops production: is it North America, Russia or OPEC? The real answer in the boom and bust cycles that play out in oil industry is all of the above, in the end everyone is going to have to cut back production as prices are going to drop like a rock in the next bear cycle in the oil industry.
OPEC Losing Relevance & Power

You see the diamond industry has an effective cartel to keep supply off the market, but since we do not have a global cartel, and because of the boom price in crude oil over the last decade, we now have a global production market once again in oil with all kinds of new participants all over the world who are not members of OPEC, so with robust growth in global production around the world, and no global cartel, you get an oversaturation of the market, and that is what we are starting to experience right now, and its effects will really start to show up in 2013 and 2014.
2015 Outlook

Then in 2015 companies are going to start losing money in their production projects, and some tough decisions are going to have to be made. And this all assumes a decent global economy, I figure the U.S. will be able to kick the majority of the can down the road for the next 2 to 3 years, but after that the austerity project in the U.S. will become front and center. And you think politics are nasty now, just wait till 2015/2016 that`s when the fun really starts.
 In fact we may have to create an entirely new independent political party to clean up the budget deficit and spending mess that Washington has morphed into today. But make no mistake it will be cleaned up one way or another, either through austerity or outright default!
So enjoy your job in North Dakota while you can, be sure to put extra income into savings, because my guess is that in four years, after oil pulls back, those projects are no longer sustainable, and the world goes back to the default supplier of OPEC until the next Boom investing cycle starts all over again.

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Gasoline & Oil Markets Rigged Far Worse Than Libor

December 25, 2012 by EconMatters   Comments (0)

By EconMatters

UBS paid $1.5 Billion for manipulating Libor, and Barclay`s already paid the piper for manipulating the Libor rate. Well, it is about time the CFTC get its act together, and start going after the culprits who rig the oil and gasoline markets costing consumers and businesses a mafia tax by paying prices much higher than the markets should be priced based upon supply and demand fundamentals in the consumption marketplace.

Gasoline Market

Today we had another build in Gasoline supplies, up 2.2 million barrels in the week for a fourth straight weekly build. We have had builds of 3.9 million barrels, 7.9 million barrels, 5.0 million barrels, and 2.2 million barrels totaling 19 million barrels build in gasoline inventories in a month.
Well, you say there must be strong demand numbers for gasoline. Nope, gasoline demand in the wholesale market is soft down 2.9 year-on-year, meaning gasoline sales this month are weak as well!
Now, what is happening to price? On November 28th2012 RBOB Gasoline prices were 2.66 a gallon, and today after 19 million barrels of build, (i.e. we no longer have short supplies on hand, about average for this time of year, in fact), RBOB gasoline prices are 2.74 a gallon.
Ergo, we have 19 million barrels of build, weak demand year-on-year.  However, this month, consumers are set to pay a whopping 8 cents a gallon more for the base commodity, which eventually will work its way to the pump over the next few weeks!
Consumers may think prices are going down.  Yeah, but they should be continually going down, and down a lot more if the gasoline market wasn`t rigged. If anything gasoline prices should have come down at least another 25 cents based upon the build in inventories.  Instead consumers will be paying 8 cents higher with these 19 million build in gasoline inventories --the fair market pricing system at work!
 In other words, there was so much supply on the market that wholesalers had to store it because there wasn`t enough demand to sell it to consumers.  Yet prices still go up for the base commodity. So instead of prices continuing to come down further, consumers will have to pay more for gasoline in the coming months, and they shouldn`t if the market wasn`t rigged by this “mafia tax”!
Libor Rates

So where is the CFTC, the Commodity Trading Futures Commission, who should monitor these price shenanigans? The same place all the regulatory authorities were when consumers were being robbed by paying higher Libor rates than the market should have dictated for all types of lending from credit cards to other types of loans.
UBS got caught and agreed to pay 1.5 billion in fines.  Will consumers ever get any of this money? Heck no!  These fines go straight to government coffers, the same government and regulatory bodies who looked the other way while consumers were being charged this mafia tax by big banks for years.
Remember, Timothy Geithner knew about phony Libor rates for years before anybody did anything about it. And they say Geithner is in line to be the next Fed chief.  Guess he makes for a good business as usual candidate since Ben Bernanke knew about inappropriate Libor rates for years as well.
These officials don`t give a crap about consumers.  They just saw an opportunity to make some money by going after these firms on Libor, long after consumers have paid far more than 1.5 billion in higher interest payments. Moreover, Consumers don`t get any of the money back, the actual victims in the scam!
The regulatory and governmental bodies responsible for monitoring these unscrupulous practices are where they always are, sitting on the sidelines for years of damage to consumers pocketbooks, and then when they finally do something about it, it is years down the line, and these firms only pay a slap on the wrist “shakedown fine”, and governments keep all the proceeds while consumers get screwed again.
How about giving the money from fines back to the real victims of these scams like the consumers in the form of tax rebates? The government made a whole lot of money off of AIG, how about giving this money back to taxpayers in the form of tax rebates? It will never happen because governments and these regulatory bodies are just as corrupt as the firms doing what I call these “mafia taxes” in the gasoline and oil markets.
They only care about how they can make some money off these firms by conducting these pseudo shake down cases just so they can get some money for their own little fiefdoms!
It would sure be nice if Obama could actually care about consumers and get somebody in the CFTC to represent consumer’s interests for a change, instead of these cozy relationships that currently exist in the CFTC for the last 10 years as the gasoline and oil markets have been rigged for decades!

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Technical Analysis of Oil Market

December 25, 2012 by EconMatters   Comments (0)

By EconMatters

When discussing this analysis we shall focus on WTI, the markets trade together for all intents and purposes, just that Brent trades $20 higher, give or take $3, depending upon certain European and Middle East news, and contract rollover repositioning (i.e., Brent contract rolls before WTI).
King of Day Trading

Brent has gained importance, and is used much more for benchmark due to the fact that it better represents global prices, and most refiners sell their end products based upon the Brent contact. However, WTI is still the undisputed King of Day Trading, and has the dedicated Pit presence in New York which runs from 8:00am to 1:30pm CST, and ultimately is still where all the consistent, major price discovery takes place. Or to say it non-euphemistically, the Pit is where all the action is! So WTI is still by volume the most widely traded crude oil contract in the world on a consistent basis, and we will base our technical analysis on the WTI CL contract. 

WTI has traded in a largely range bound manner for the last two months with the bulk between $85 on the downside and $89 on the upside, a very tight $4-dollar range. We have had push downs intra-day all the way to just below $84, and push-up moves just above $90.  Nevertheless, price didn`t stay there long as buyers and sellers jumped all over those price levels, and made money as price moved back to the meat of the trading range, which is where we currently find CL at approximately $86 a barrel after the first week of December.

Fundamental WTI

Expect a push-up with all other risk assets if we get some semblance of a fiscal cliff deal or expect a push- down if we fall off the cliff. Depending upon the makeup of the fiscal cliff deal, i.e., the Grand Design, or just kicking the can down the road with a minimalist measure, there will be some type of rally in crude oil.
Crude oil, unlike equities, will still have to account for the fundamentals which have been bearish, and could temper any rally from developing into a sustained trend. For example, even though crude oil is being purged for tax purposes and refineries are running at a 90% run rate, it is barely making a dent in crude oil supplies, and the end products are starting to build inventories because the demand for end products just isn`t strong enough right now.
Rising petroleum end product inventories means less need for oil in the future. I expect products to build with slight draws in crude oil through the end of the year. If we get builds in both crude oil stocks and end product stocks, it will put downward pressure on oil, and we will test the $84 level to validate whether that level holds through the remainder of this year.
Technical WTI

Oil trades like an asset class similarly to equities or gold.  If we have an event where major selling occurs in all asset classes, this is the most likely scenario for buyers stepping away from the $84 level, and letting WTI fall to the next level of support at around the $80 level, with the next support at $78 a barrel. These are the near-term levels of support that have always supported the contract, and where buyers have stepped in after major push downs, usually liquidation events are responsible for reaching the $78 level. Then buyers step in, the shorts cover and price moves rather quickly to the $83 level.
The first quarter of every year is where fund managers make their numbers, so new money usually flows into asset classes during the first of the year. Under that scenario, WTI should move up and test the upper part of the range, and whether it can push through the $90 level will depend on whether inventories can come down, i.e., several weeks of drawdowns leading to months where we take 10 to 12 million barrels off the existing inventory levels in the 370 million area currently. We need to see at least 30 million barrels of drawdowns to move price back to the $95 a barrel level. Without this any rallies in WTI will be faded or sold into curtailing any sustained momentum from forming.
So oil for the next three months will be more of a Trader`s market and less of a trending market where traders have to take pieces of prices where they can, and avoid buying or selling the top and bottom of the market unless extreme circumstances present themselves. The trader can buy small technical price breakouts, but always be wary of being too committed to these breakouts, as we have seen by the last two months price quickly reverts back to the bulk of the trading range.
The successful CL trader will be nimble, watch their technical levels, and get in and out for the most part, with occasional mini trends to take advantage of from time to time. With abundant supply levels, volatility is definitely on the decline. Most of the volatility will probably stem from asset rebalancing, market dislocations in one asset class affecting other asset classes, and I expect more volatility to the downside than upside.
Real Down Side Pain

The stronger case for real pain, i.e., participants stepping away from the market or being surprised by the market, is to the down side, in my opinion. This could occur because of a major down grade of US debt, over supply issues, or Europe sinking further into recession than forecast.
Any break and close below the $78 level pushing down to the next level of support would cause major pain in the oil market as many models would be violated by this occurrence.
Once models are violated, all bets are off when it comes to commodities, and price seemingly goes farther than one would logically predict, i.e., it is too low to be going down further. This phenomenon causes buyers to step in trying to catch a falling knife, and their getting stopped out adds additional fuel to the downside move.  If everybody believes that $75 should hold, and it doesn`t, panic ensues from real pain in the market, buyers step away altogether, and price can go farther than you think to the downside.

Market Feel & Technical Analysis

WTI is a commodity, and commodities adhere more to technical analysis criterion than other asset classes, but technical analysis is not perfect or something that can be applied rigidly or religiously. It is just a tool to be used as a guide with other sources of information like fundamentals, market sentiment and mechanics, economic reports, consumer and investor trends, capital flows, geo-politics, OPEC decisions, maintenance and outages, natural disasters, and other inputs to the oil equation.
But most of all, technical analysis revolves around market feel for how to apply technical analysis, when it will be violated, when it is likely to hold, close enough levels, etc.  This ‘market feel’ is the most difficult skill to acquire in the quest of mastering oil markets. 
A successful oil trader has to have a great feel for what the market is currently doing, and this serves as a solid base for what the market is likely to do next. The “feel” for how to apply technical analysis is the ‘art’ in the equation that overlays the ‘science’ of historical pricing patterns.  

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