Crude Bears Are Coming Out Of Hibernation…
After an incredibly strong start to 2014, West Texas Intermediate crude oil is back on the downswing.
As you may remember, the essential commodity surged from $92 a barrel in early January to a high of $105.22 on March 3rd. Investors grew decisively bullish as the newly started southern leg of the Keystone XL pipeline shuffled oil away from Cushing, Oklahoma to Gulf Coast refineries.
But now all the bullish excitement is starting to wear off…
The crude market is once again succumbing to reality. Not only is US production still sitting near multi-decade highs, but global production is creeping upwards as well.
In fact, global oil production jumped by 600,000 barrels from January to February.
The main reason for the increase in global output was Iraq. Despite ongoing political instability, the country is pumping up production to just over 3.5 million barrels a day- the highest level since 1979. What’s more, Libyan output is slowly coming back online, which will increase global production as well.
And that’s not all…
The most recent EIA oil inventory report revealed US crude stockpiles jumped by 6.2 million barrels for the week of March 7th. Increased imports, strong domestic production, and a downturn in refining capacity utilization all played their part.
But the factor playing the largest role in oil’s downfall is dwindling refining rates…
You see, refinery maintenance season is in full swing here in the US. As a result, refinery demand will be lighter than normal over the next few months. Due to this decreasing demand, oil inventories will build up in Cushing as well as the Gulf Coast hubs.
Given the current market dynamics, it’s likely we see crude fall into the low $90 range soon. But once it does, investors will be presented with a compelling buying opportunity.
Let me show you what I mean…
As you can see, there’s strong technical support at the $92.50 area (green line). Each time WTI crude has dropped to this level over the past six months, bullish investors quickly took it higher.
How can you capitalize on movements in the crude market?
As oil slides lower over the next few weeks, you can look to the US Short Oil Fund (DNO) for profits. As you may know, DNO is an inverse oil ETF that rises when the price of crude falls.
But once oil reaches the $92.50 area, it’s best to close your DNO position and switch to the long side of the market.
You see, by that time investors will be looking forward to the summer driving season and the increased crude demand that goes along with it. One of the easiest ways of playing the long side of the crude market is via the US Oil Fund (USO).
Until Next Time,
Justin Bennett
Category: Crude Oil
