Crude Is Due for a Pullback

Crude oil futures on the New York Mercantile Exchange this week hit a fresh 2.5-month high of $54.66 a barrel, basis the nearby May contract. Prices are in a solid five-week-old uptrend on the daily chart, from the mid-February contract low of $39.42.

A rebounding U.S. stock market and a flagging U.S. dollar vs. its major counterparts have been key supportive "outside markets" for the crude bulls recently. The solid rebound in the stock market has given crude oil traders some optimism that the worst of the worldwide economic crisis is behind us, which would likely mean an increase in demand for liquid energy products. However, with crude oil traders so closely looking to the stock market for direction, any pullback in equities is very likely to find crude selling off, too.

Importantly, there has been renewed speculative buying interest in crude oil futures -- and in other raw commodity futures markets -- over the past few weeks. A growing camp of investors believes that recent actions by the major central banks to inject huge amounts of liquidity into the world financial system will ignite inflationary price pressures at both the wholesale and retail levels. The surprising March 18 announcement from the Federal Reserve that the U.S central bank will purchase large amounts of U.S. Treasuries and U.S. mortgage debt only exacerbated notions of inflationary fires being stoked amid devalued major currencies of the world. Inflationary pressures are a major bullish fundamental factor for commodity markets.

Commodity bears who view the current world economic environment with a deflationary bent have been confounded by crude oil's recent rally. Oil supplies in the U.S. are currently at the highest levels in years. The latest Department of Energy weekly stocks report on Wednesday showed U.S stockpiles rising 3.3 million barrels to a 16-year high. Worldwide crude oil output has declined over the last year, with the Organization of Petroleum Exporting Countries curbing its production quota in an effort to boost prices. OPEC has cut production by more than 3 million barrels a day since late 2008.

FutureSource.com and TradingEducation.com

From a technical perspective, the slow stochastics momentum indicator overlaid on the daily chart for May crude oil futures does show a market that is overdone on the upside and due for at least a corrective pullback very soon. Both lines of the stochastics indicator are reading around 94; any readings above 80 suggest a market that is overbought on a short-term technical basis.

In the meantime, an examination of the longer-term weekly chart for nearby Nymex crude oil futures shows the market is just trying to regroup after a massive decline of more than $100 from the July 2008 all-time high over $147 a barrel. The posture of the weekly crude oil chart still favors the bears and cannot be considered to be bullish, despite recent price gains.

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Know what you own: Companies affected by the price of crude include ExxonMobil (XOM - commentary - Cramer's Take), ConocoPhillips (COP - commentary - Cramer's Take), Chevron (CVX - commentary - Cramer's Take), BP (BP - commentary - Cramer's Take), Marathon Oil (MRO - commentary - Cramer's Take), Tesoro (TSO - commentary - Cramer's Take) and Valero (VLO - commentary - Cramer's Take).

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Jim Wyckoff is a senior market analyst for TradingEducation.com a free educational Web site. In addition, Wyckoff writes a blog offering current market commentaries every morning on TraderBlogs.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Wyckoff appreciates your feedback; click here to send him an email.