David Singer is a technical trader, who took a long term look at Crude Oil:

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Category: Commodities, Energy, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “Crude Oil Support at $40”

  1. Patrick Neid says:

    Nice chart.

    Yup the bubble is over and now we are back to being a normal market. If we go over the recession cliff towards a more ominous contraction we’ll trade a lot lower on collapsing demand. On a side tech note, generally if you break a .618 retracement the old rule of thumb is you return to where the original measurement started from. In this case its down near $10. Currently we are at the lesser used .786 as a last ditch effort to pimp “peak oil”.

  2. Andy Tabbo says:

    Patrick Neid: The 78.62% is ‘lesser used’ and it’s definitely lesser known, but a lot of Wave guys and Fibbo retrace traders I know use the 78.62% as the stop out point on trades. So, a decisive break of 78.62% around $40 bucks would be a very bad indication longer term. However, it needs to be decisive….if we trade down to 37-38 and then snap back violently, then I would consider that a very bullish short term signal.

    All of the commodities are getting near some serious wave count objectives, except for gold, which is sort of a quasi-commodity that trades a little differently.

    My favorite commodity based trade, though, is to look at Wheat in the $4.00-$4.20 area…currently trading $4.75 on march futures. The Wheat chart has a VERY similar look to crude from a classical charting basis. But, you can see a mega-Head & Shoulders formation on the Wheat log scale that also targets $4.00 ish. So, there’s A LOT of support for that market just below. That being said, the wave count is not yet complete, so we probably are heading for $4.00-$4.20 zone. Additionally, given how much support I see in front of $4 buck Wheat, I would NOT want to see it trade below there. A break of $4 bucks targets $3-3.30 zone.

    I don’t always agree with Jim Rogers, but one cannot dismiss the fact that he’s been correct, A LOT. And his current thesis is: “buy things that are ‘unimpaired’ like grains and cotton…farmers cannot get credit to get their crops planted…” I don’t know how much of that is true and I really don’t care about the “fundamentals,” but if I were to buy any commodity, it would have to be the Agricultural-based commodities. Intuitively, it just seems that grains should be less impacted by a global recession than oil. I could be way wrong on that idea. Wheat was the first commodity to peak and blow off this year (Feb) on the parabolic spike, so maybe it will be the first to spark a good snap back rally?

    - AT

  3. leftback says:

    Thanks for this. My first candidate for support was $60. But that more fundamental support level at $40 had also caught my eye, which is why I have been trying to get started in the energy stocks of late, buying what hedge funds are selling, and getting a bloody nose in the process.

    We should all recognize something in this classic bubble chart – the role of speculators. Although a lot of the fall in commodity prices we have seen is demand driven, clearly we have not seen 60-70% decreases in demand! A lot of what we see in the chart above is the result of the building and subsequent unwinding of highly leveraged trades against the $. Now that the $ has flattened out, the driving force for this unwinding seems to be abating. A fall in the $ from here would therefore seem likely to reverse the recent trend.

    My best guess is that $40 does hold and we see a range between $40-$60, which is why most of my trading cash in this area has gone to refiners and integrated oil companies that would perform well in this price domain. VLO and COP have traded at multiples of 4 lately and have a dividend. I will take that over the 100-year Treasury.

    A secondary consequence of this is that “other” energy stocks may also rally. I do not include solar, which has been a haven for speculators, but the action in coal, nat gas and uranium stocks now reflects a society where everyone lives in San Diego and never uses electric light or drives a car. I would suggest that this is unlikely to be true going forward. Disclosure: I own a number of uranium mining stocks.

  4. craig k says:

    OPEC is getting serious about cutting back on production, I mean serious, I wouldn’t be surprised to see them cut back 2 million barrels a day next week. I know several independent oil producers and that have all cut back on production, returned rigs, shut in wells, etc. Fundamentals do matter.

  5. karen says:

    $gaso hit .90 on friday and closed at .91! i was able to fill put premium fuel in my 2007 tank for under $2/gallon for the first time.

    california freeways were packed yesterday. i drove a friend out to Palm Desert, a place i hadn’t visited in 20 years. it was spectacularly beautiful. while fuel prices are bittersweet, i think it will go a long way toward keeping people afloat.

    OT, but a great read:

    http://epicureandealmaker.blogspot.com/2008/12/source-of-de-nile.html

  6. leftback says:

    @ Karen: If only we all had an enormous tank we could fill at these prices…. it’s not going to last.

  7. DL says:

    The 30% divergence between USO and SPY since November 20th is one of the factors that dissuades me from being bullish on SPY at this point.

  8. jmann says:

    I’m not a TA whiz, but isn’t that chart saying that if oil would drop down below 40, then upper resistance would be at 40?

    It looks more like the next lower level of resistance is just below 30. Am I missing something?

  9. DL says:

    craig k @ 1:24

    Can’t non-OPEC countries (Canada, Mexico, Norway, Russia, etc) make up the slack?

  10. @karen

    here, LV, Penn., Reg. U-Leaded is ~U$D 1.75/gal, that ~U$D .85 spread from the NYMEX is, still, toward record highs. LSS: peep are, still, being screwed, now with higher %’s

    similiarly, the spread between Reg. y ‘Super’ is ~U$D .30-.35, v. ~U$D .12/wholesale, it’s never been higher..

    @AT

    I really do appreciate your posts, you have a great handle on TA..

    ~~

    and, price-wise, going fwd:, just like we saw highs, and higher, than imagined, highs, something is telling me that we’re fixingto see lows, and lower, than imaginable, lows..

  11. mudpuppy says:

    Demand never went up enough to merit oil at 147, therefore demand didn’t have to drop nearly as much. Nevertheless, demand is dropping all over the world. There is so much oil around the producers don’t know where to put it.
    Also, opec talks a good game about cutting production, but they all need the cash flow and can’t cut so they cheat.
    I don’t know where the price of oil is going, but the trend is down.

  12. DL says:

    leftback @ 12:23

    “We should all recognize …. the role of speculators”

    Yes, but what does that MEAN, exactly?? We heard about this all summer from the politicians: those evil speculators were driving up prices, and if we could only reign in the speculators, we would never have to drill for more oil.

    Now that we are on the other side of the mountain, it’s worth revisiting what the term “speculator” means. According to my simplistic understanding, there are only three types of people/entities that can actually influence the price of oil for a given dollar exchange rate:
    (a) the people who actually use oil, (b) the people who produce oil, and (c) companies and other entities that have the capacity to store large quantities of oil.

    According to many in Congress, all that one has to do is increase margin requirements on futures traders and that will solve all of the problems. Clearly that is not true.

    So, setting aside those who produce oil, and setting aside those who influence the exchange rate of the dollar, who exactly are the “speculators”…?

  13. karen says:

    I might be moving into jmann’s camp if $wtic can hold below $40 for a few days. Previous to this I had been thinking crude would finally stabilize in the 43-48 range for a good 6 months…

    I’m still of the mind we won’t see $wtic over $60 unless extenuating circumstances arise.

  14. leftback says:

    @ Karen: OT, but a great read:
    http://epicureandealmaker.blogspot.com/2008/12/source-of-de-nile.html

    Thanks, leftback enjoys a spot of Schadenfreude with his coffee.

    @ DL said: According to my simplistic understanding, there are only three types of people/entities that can actually influence the price of oil for a given dollar exchange rate:
    (a) the people who actually use oil, (b) the people who produce oil, and (c) companies and other entities that have the capacity to store large quantities of oil.

    Well done, mate, you actually answered your own question. The oil companies (c) and China (a) and the oil producing countries (b) were all storing oil for a variety of reasons – and the price (in $) was also amplified by leveraged bets against the dollar. It’s not rocket science, this economics stuff, you know.

  15. leftback says:

    @ Karen: “Previous to this I had been thinking crude would finally stabilize in the 43-48 range for a good 6 months…I’m still of the mind we won’t see $wtic over $60 unless extenuating circumstances arise.

    You can make an argument that $40 and $60 crude represent the limits of a slow oscillation in oil and the $ that will likely take up much of 2009. After that (depending on the aggressiveness of the printing)we make the transition from “stagdeflation” , to use a lovely Roubini-ism, to good old-fashioned stagflation, 70-s style, as rising commodity inflation crushes the fledgling recovery and so we make a W-shaped recession, before Tall Paul is called in to set us on the road to righteousness.

    We are about to begin the upstroke in the middle of the economic W. The overall stock market bottoms in the second leg down according to this model. No way the equity misery is over, not with GOOG at $280 and other patently absurd valuations everywhere… the pain will not be complete until all vanity has been purged and we see P/E ratios in single digits. Buckle up, kids, the fun is just getting started.

  16. DL says:

    leftback @ 2:34

    Yes, my point, in a roundabout way, is that the only “speculators” out there who really influence the price of oil are those who produce it, and those who influence currency exchange rates. (I’m not an expert, but I just don’t think that storage of oil by entities that do not also produce it is a major factor in pricing).

    Then of course there is the question, why does everyone blame unidentified “speculators”, rather than pointing the finger where it belongs?

  17. Greg0658 says:

    Are the Strategic Oil Reserve tanks on autowatch with a metered fill guage the public can see? This $ drop is suspicious for the economy alone. The living world uses oil, even tho the economy is die’g. I see talk of $25 barrels. This whole GWB oil period is crazy.

    I want to see new car sales and a buy filled Christmas – but that saved oil is for a war shortage – imo.

  18. Bruce in Tn says:

    @Leftback:

    Since you are going to be in Memphis this week..you need to stop by Hueys to get your burger….

  19. DL says:

    On the subject of currency “speculators”:

    I’m not convinced that, when one looks at exchange rates on a year-over-year basis, or a month to month basis, that currency “speculators” are really the major driving force behind the resulting exchange rates. For example, in July, EUR/USD got up to 1.60, and is now about 1.27. How much of the NET capital flows between the U.S. and Europe over the last 5 months was actually due to currency “speculators”….? I would venture to guess that very little of the net capital flows over the last 5 months have been due to people who are speculating purely on future currency values. Other factors, such a merchandise flows, investment bets on individual companies, and “deleveraging” issues have probably been dominant over this period.

    Which leads to the conclusion that the only real oil “speculators” out there are the people/entities that produce it.

  20. karen says:

    Barry Ritholtz is in Barron’s this weekend… and it’s a great read! hope this link works without a subscription:

    “A big bear turns bullish, sort of”

    http://online.barrons.com/article/SB122852213723784245.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_right&page=sp

  21. jmborchers says:

    Karen, thx for that. Finally we know how Barry’s funds are doing. Between single dig loss and single dig gain is pretty good considering the market. Although I don’t understand Barry’s likes of the ultra broke funds, even for trading.

    Mark E are you referring to Lehigh Valley? If you are we are neighbors.

  22. AnotherGuy says:

    A couple of thoughts:
    1. What impact does me buying USO (for example) have on oil price? It seems one can impact the price of oil through futures trading without needing to store oil at all.
    2. Demand for oil doesn’t need to fall (or rise) *that* much to get significant price movements. The slope of the supply/demand curve can be pretty steep.
    3. Related to #2 is that there is significant incentives for oil countries to keep production up. No one wants to be the one who suffers losses to bail the others out. So oil can probably keep falling to the point that its price equals the day to day cost of getting it out. Once they do decide to cut production there would also be a delay before the customer feels the shortage.
    4. There have been some moves towards other energy sources that in the short term also reduce the demand for oil. (nuclear, wind, solar, coal, natural gas)

    What do you think?

  23. DL says:

    AnotherGuy @ 5:24

    “What impact does me buying USO (for example) have on oil price? It seems one can impact the price of oil through futures trading without needing to store oil at all”.

    In the futures market, there’s a short for every long. If you want to argue that buying a futures contract pushes up the price of the underlying commodity, you then have to concede that shorting it will lower the price. A zero sum game, it seems to me.

  24. SINGER says:

    There was “Support” around $78 and around $50 as well…. Needless to say, those levels didn’t hold…

  25. @jm yes, totally, LV=Lehigh Valley, “Home of the 2010 AAA All-Star Game”
    ~~

    @AnotherGuy

    with this: “So oil can probably keep falling to the point that its price equals the day to day cost of getting it out.”, this: “the point that its price equals the day to day cost of getting it out.”–has no bearing on anything, over the short-run..see: Pilgrim’s Pride for ex.
    http://www.foxbusiness.com/story/markets/industries/retail/update–pigrims-pride-files-bankruptcy/

  26. Stuart says:

    speculators can push oil in both direction as we are witnessing. Keep it up boys. How do you spell supply shock as all new projects are shut in or shelved. O-I-L
    This depression scenario that is unfolding better have legs else this spelling lesson is going to be taught to grade 1 students going forward as the 1st word they learn.

  27. Although a lot of the fall in commodity prices we have seen is demand driven, clearly we have not seen 60-70% decreases in demand!

    Exactly. As if the 100% increase in crude oil prices from July 2007 to July 2008 was because of a 100% increase in demand.

    I’d say the $30 dollar value looks like an even stronger support and $25-35 will be the range for the next 12 months. It is 6-12 degrees in New England right now — heating oil prices should be spiking due to oncoming very cold weather. Yet, crude prices are falling.

    Odd.

  28. Scientist says:

    Charting is the present day equivalent of Astrology and Tea Leaf reading.
    Millions of people believed in that stuff, so charting must work. right?

    Clearly the madness of crowds didn’t dissipate at the turn of the 20th century.

  29. to those that, lightly, dismiss the Storing of Crude

    see: http://www.bloomberg.com/apps/news?pid=20601087&sid=aSywZ2vJlJf0&refer=home

    a timely missive on said phenomenon..

  30. DL says:

    Scientist @ 5:26

    Are you long or short?

  31. BR,

    this, btw, turned out to be, another, severely Nice trading call..spiked over U$D 48 after this post.