Oil Moves Past $129, Defying Technicals

Although technical indicators show waning bullishness, the weak dollar drives energy higher.
By Chuck Marvin ,

Crude futures are surging higher in early Tuesday trading at the New York Mercantile Exchange, fueled by a sharp fall in the value of the U.S. dollar.

However, technical indicators in the West Texas and Brent Crude futures strips are simultaneously suggesting that bullish trading sentiment is quickly losing steam, and that the price of crude oil could soon cool off and stay that way for the intermediate term.

Crude was recently up $2.11 at $129.16 a barrel, its highest intra-day trading level ever. Most of the move occurred in the first five minutes of Nymex trading.

Brent crude was recently gaining $2.44 to $127.50 a barrel. Reformulated gasoline was 6 cents higher at $3.29 a gallon, and heating oil was advancing 9 cents at $3.77 a gallon. Near-term natural gas was moving 23 cents higher at $11.19 per million British thermal units.

The U.S. greenback was battered in the overnight trading session, with the euro gaining a cent and a half to $1.5645. The U.S. Dollar Index, which measures the value of the dollar against a basket of global currencies, was recently losing 0.8% at 72.47.

Cramer: This Is Not a Recession Led by Oil

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The price of oil tends to rise when the dollar falls in value because oil is priced in U.S. dollars in international energy markets.

While news of the falling dollar is clearly whetting the appetite of oil buyers early Tuesday, the futures curves for both WTI and Brent crude are quickly moving from backwardation to contango -- a very bearish signal.

A commodity is in backwardation when the shape of the curve created by the price levels of its various monthly contracts is downward sloping. Commodities that are in contango have upward sloping futures curves.

The shape of crude oil's curve is a very important factor to consider when forecasting what might lie ahead for the commodity because of the underlying data represented by the two different relationships, says Stephen Schork, publisher of The Schork Report.

"When crude is in a state of backwardation, the near-term price of crude is more expensive than the following month's contract price," Schork said. "That is a tell-tale sign that the market believes there is a lack of supply, because buyers will pay a premium to get the oil today rather than tomorrow."

Inversely, when oil is in contango, the price of the near-month contract is less expensive then the following month's contract. That is "a sign that market demand for the product today is lagging," said Schork. "It also means that the market is not worried about future supply constraints."

Also noteworthy is the pace at which the term structures for the two crude contracts have flipped over. Commodity analyst Dennis Gartman said in a research note that "The change in one month is astounding, and attention must be paid." Both WTI and Brent Crude have been in backwardation since early last summer.

The story being told by this technical data is that the market now thinks that demand for crude oil this summer will lag, and that the concerns about tight oil supplies that have been a dominant theme in the market's overall outlook is evaporating, according to Schork.

"It's looking like we will have plenty of oil in storage to get us through the summer driving season," Schork said.

Meanwhile, U.S. equity markets are getting hammered by today's soaring oil prices and new data showing that domestic inflation is on the rise. Energy stocks, confused by the juxtaposing news of high oil prices and a weaker economy, are not yet heading in a unified direction.

Among Integrateds,

BP

(BP) - Get Report

is up fractionally at $74.98,

ConocoPhillips

(COP) - Get Report

is adding 0.8% to $93.43,

Petrobras

(PBR) - Get Report

is 0.3% lower at $72.00 per ADR and

Exxon

(XOM) - Get Report

is up 0.4% at $94.79 a share.

In the U.S. refining space,

Valero Energy

(VLO) - Get Report

is falling 0.7% to $49.33, while

Tesoro Corp

(TSO)

is down 2.5% at $25.03 a share.

The

U.S. Oil Fund

(USO) - Get Report

, an exchange-traded fund that closely tracks WTI futures, is up 1.5% at $104.33.

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