Oil Surges to New High

Crude hits a record high and closes at a record $128.92, but technical indicators suggest the commodity's bull run may be coming to an end.
By Chuck Marvin ,

West Texas crude for June delivery surged higher in Tuesday's trading session at the New York Mercantile Exchange, closing at a new record high of $128.92 a barrel.

The day's jump in oil prices was first fueled by a sharp decline in the value of the U.S. dollar in overnight trading, and was later encouraged upward in the daytime session when oilman T. Boone Pickens predicted in a televised speech that oil's next stop is $150.

Texas light crude reached an all-time intraday high of $129.60 a barrel before ducking below the $129 level just before the market closed. Brent crude finished the day with a $2.71 gain to $127.77 a barrel.

The remaining Nymex energy products also made solid advances in the session. Reformulated gasoline was 6 cents higher at $3.29 a gallon, and heating oil climbed 9 cents to $3.77 a gallon. Near-term natural gas moved up 41 cents to $11.52 per million British thermal units.

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.

The U.S. greenback was battered in the European session and remained under pressure in U.S. trading, 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, lost 0.84% at 72.41.

Movements in the value of the U.S. dollar are closely tracked by energy traders. The price of oil tends to rise when the dollar falls in value because the commodity is both priced and traded in U.S. dollars in international energy markets.

Oil's skyward trajectory was the top business headline of the day, and financial news outlets discussed little else besides the economic causes and consequences of $129 a barrel oil. Pickens, the oilman and net-long oil investor, added fuel to the fire by predicting that oil will soon be trading at $150 a barrel in a television interview that was replayed continuously throughout the day.

Although Tuesday's oil market resembled a ravenous feeding frenzy of bullish speculation, the futures curves for both WTI and Brent crude are quietly but quickly moving from backwardation to contango -- a very bearish signal that so far has been largely ignored by the market.

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, according to 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 took a beating from today's soaring oil prices, as well as new data showing that domestic inflation is on the rise. Although the energy space was the day's leader in equity markets, most oil stocks seemed confused by the juxtaposing news of high oil prices and a weaker economy and failed to move in a unified or commanding fashion.

Among Integrateds,

BP

(BP) - Get Report

is down fractionally at $74.67,

ConocoPhillips

(COP) - Get Report

is adding 0.85% to $93.52,

Royal Dutch Shell

(RDS.A)

is unchanged at $84.80, and

Exxon

(XOM) - Get Report

is sinking 0.2% at $94.16 a share.

In the U.S. refining space,

Valero Energy

(VLO) - Get Report

is falling 0.85% to $50.11, while

Tesoro Corp

(TSO)

remains unchanged at $25.60 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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