Crude oil futures traders have become extra jittery in the past few weeks, as evidenced by the marked increase in intraday price volatility -- both on the upside and on the downside. On Wednesday, the market rallied sharply on renewed worries about political-related violence in major oil exporter Nigeria. Thursday saw the market sink dramatically on reports that China is planning to increase its centrally controlled fuel prices by around 17%. And on Friday, the market rallied smartly on reports that Israel is conducting military exercises amid its grave concern about Iran's nuclear ambitions.
Throw into the fundamental mix a Saudi Arabia-orchestrated summit of major oil producers and consumers on Sunday. Traders and analysts are uncertain and have mixed opinions on whether the meeting will result in any specific, significant action on the production front. Most doubt the meeting will produce anything more than rhetoric from OPEC producers and the major consuming countries. Reports Friday quoted OPEC President Chakib Khelil as saying a crude oil production quota increase doesn't make sense.
Simmering on the back burner and not going away is government jawboning about excessive speculation and even manipulation in the energy futures markets. The U.S. commodity futures regulator, the Commodity Futures Trading Commission, on Tuesday said ICE Futures Europe had agreed to new position and accountability rules for some of its U.S.-traded crude oil contracts. Basically, ICE will operate under the same regulatory oversight as the New York Mercantile Exchange. The CFTC also said it will require daily large-trader reports and position and accountability limits from other foreign exchanges. This latest development is just one more underlying factor that is limiting upside price movement in crude oil futures and helping to keep prices in a sideways trading range.
Indeed, in the liquid energy futures markets, it's now a game of "What's the Latest Fundamental on the Newswires?" "Up one day, down the next" has been the pattern for two weeks, as prices chop in a sideways fashion at higher price levels. July crude oil futures on the New York Mercantile Exchange did notch a fresh contract and all-time high on Monday at $139.89 a barrel. That's the top of the trading range. The bottom of the range is located at strong technical support around $131 a barrel. A downside "breakout" from this trading range would be significantly bearish to suggest at least a near-term market top is in place.
The recent higher price volatility at higher price levels is not a bullish technical signal and history shows that such price action is an early warning signal of a topping process in a market. Nymex crude oil traders at present are buying the dips and selling the rallies to keep prices in the aforementioned trading range.
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Oil Deconstructing the Oil Bubble 6/4/2008 2:59 PM EDT How did we get here? Who is to blame? And how do we find our way out of this mess?
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.
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