Will Energy Traders Continue Outsmarting Most Economists?

Energy traders have led the way in having a better understanding of the world's economic recovery and positioning their trades accordingly. Crude has steadily risen to a 70% gain off last year's lows despite most economists, until recently, arguing for no or a very slow worldwide economic recovery. Will crude's up trending ways continue or is energy in the process of correcting an overly bullish market?

Energy bulls, much like equity bulls, have been much maligned by most economists over the past year. Energy bears taking their trading ideas from these economists, have handed over huge losses in the zero sum game of futures and options. Now that crude is staring down the $90 and potentially the $100 level, will the bulls keep charging?

In free markets all commodity pricing eventually obeys the law of supply and demand. Crude and its refined products have seemed to break away from this law the past 10 weeks with crude stocks rising continually with very little pull back in price. Gas and distillate stocks are at multi year highs and storage costs for crude are on the rise as over supply bids for storage. Crude future term spreads which appeared to be heading for backwardation, have recently widened keeping the contango market in place.

Also, affecting petroleum products supply will be more refineries in the United States and worldwide, soon to be coming online. Affecting crude supplies are better and more economical drilling techniques, spurred on by higher crude prices.

So where are crude prices headed? No one knows for sure. That is why most successful energy traders rely on technical analysis with a small dose of fundamental analysis thrown in. We are likely to see bulls make a run at $90 possibly $100, however the current overbought condition will make $90 the higher probability near term high. Bulls will be more than happy to collect their profits at these levels, and traders should be prepared for a slide back to $70 as contracts are exited by bulls ringing the cash register. Of course the bulls will be right back in the market stronger than ever at the $70 level, so when the market looks like it is about to crash, that is when the large houses will be putting even more cash to work.