In the previous articles of this series, I mentioned a bearish divergence forming in crude prices and a bullish divergence forming in the US Dollar. These relationships, in conjunction with a fragile economy, have alluded to the reversal of crude prices.
Recent reports have indicated that crude oil demand could increase in the short term. Even though these reports may signify that there may be an increase in demand, it does not necessarily denote that demand will increase. Given the current market conditions, I believe that further appreciation of crude prices will directly impact the recovery of our global economy.
This morning at 10:30ET, the EIA will be publishing its weekly status report on crude inventories and production/import amounts. This report will be pivotal in helping align current supply levels with our demand. A recent Bloomberg news survey showed that OPEC may have decreased its oil output for last week.
http://bloomberg.com/apps/news?pid=20601072&sid=acn38DusOPL4Assuming that the survey is accurate and OPEC reduces their output, will the reduction in supply be enough to stabilize crude?
Unless OPEC reduces their output by a significantly large amount, and US stockpiles decrease at an alarming rate, I do not believe it will be enough to help stabilize crude prices at these levels. Regardless of OPEC’s reduction in output, I believe that supply levels will exceed demand and move crude prices lower.
In the chart below, the EIA has shown that the current US crude stockpiles are exceeding their average amounts. This is another indication supporting the theory that supply could be exceeding demand.
Given the current market conditions (no hurricanes, etc…); I believe crude prices could depreciate nearly 25% before stabilizing around $50-$55 by the end of 2009.
Trade smart and prosper
Disclosure: At time written, author owns multiple USO Puts.
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