Energy Stocks Light the Way

Crude futures have been on a run since the start of the year. Bouncing off lows in the high 30's, crude tested the yearly high mark of $55 this week. Has the bull market returned?

Whether a particular market is bullish or bearish always depends upon the time frame of the price sequence being observed. Traders may be bullish on a 1 day price pattern, yet bearish on a 1 year pattern.

The inherent scarcity in crude supplies long term keeps the bulls in charge until a disrupting technology/ies, replaces crude as a base fuel stock. Therefore, traders will be looking to buy crude on price dips.

How does a trader now when a particular dip in crude will not dip even further? An excellent indicator is the price pattern of energy stocks. Energy stocks began declining well before crude hit its $149 high. Alert traders took advantage of this signal and began shorting crude. Over the past few months we began to see energy stocks move higher. Subsequently crude followed equities' lead.

Using the energy equity indicator, traders have a higher probability of successfully executing a bull trend strategy.

Fed Fires Up Its Own Brand of March Madness

The U.S. Federal Reserve shocked the energy complex into life this week announcing it will buy $1.15 trillion in treasuries. The purchase will include $300 billion in long term bonds and the balance in mortgage debt. Their hope is the influx of cash into the economy will lower interest rates and stimulate consumer spending.

The surprise monetary policy announcement sent crude prices higher, as the US$ fell over 400 points vs the euro. Crude traders drove the front month contract to over $52. Highest price for crude since late 2008. Distillates and gas futures also improved on hopes of an improved economy creating stronger demand.

The gains this week in crude could be tempered by seasonal refinery maintenance shut downs. It also remains to be seen whether banks will significantly lower interest rates to consumers. Should the lenders continue to hoard, monetary velocity will not increase, thwarting the Fed's stimulus objective.

OPEC Seeking Compliance From Members

OPEC's Vienna meeting concluded with members agreeing to make no adjustments to crude production levels. The focus turned to compliance with existing production cuts. OPEC states that full compliance will remove 800,000 bbls per day from the market.

The market will not be impressed with this rhetoric. The near month crude contract will not be able to break through $50 resistance on this news. Look for a bit of a sell off from today's meeting.

This week will be interesting to watch stronger correlations develop between equities and crude futures. Both are leading indicators, and both feed off each other in an improving economic environment.

OPEC Decision Could Be a Short Set Up

We have seen a steady increase in the energy complex over the past five weeks.
Seems to be a bit counter intuitive with the steady news stream of continuing economic deterioration.

One of the major factors is the decreasing crude supply from record levels at Cushing, OK.
This has helped WTI to trade at a premium to Brent. “A lot of what we are seeing is a return to normality,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “WTI needs to trade at a premium to Brent to attract the imports that we need.”

This week OPEC takes center stage as they are expected to announce potential further cutbacks in crude production. Near month crude futures will have the opportunity to test $50 resistance levels should the cuts surpass market expectations. Range traders will be looking to short at $50, hoping to ride the likely sell off back down to $40.

Energy Market Observer Blog