Crude oil has been coming off contract highs in recent weeks. Does the decline make it a buying opportunity, or is this the start of a bigger downtrend?

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I have a short-side bias, and the reasons start in Venezuela. Let's begin by remembering the tumult in that country, which caused lots of volatility in April. Crude spiked after President Chavez fired top management at the state-run oil monopoly, Petroleos de Venezuela. Workers went on strike in protest, and Chavez was temporarily ousted, then reinstated, in one of the fastest turnaround coups on record.

But now the disruption in supply caused by our nearest OPEC neighbor appears resolved.

One of the concessions made in the aftermath of the political and oil-labor strife was a promise to reinstall Ali Rodriguez as Venezuela's oil minister. Rodriguez had held the position before, in 1999, when oil tanked to $11 a barrel. And what is Rodriguez doing prior to his reinauguration to the chief post of Venezuela's oil ministry?

Dow Jones Newswires

cites reports that claim Rodriguez recently ordered Petroleos de Venezuela to crank up output 8% over its OPEC quota of 2.49 million barrels a day. Estimates from Petrologistics, an oil consulting and tanker tracking firm, appear to confirm the move. Exceeding OPEC quotas was a primary reason oil fell to $11 a barrel when it did.

Another hitch with Rodriguez is that he will be stepping down soon as secretary general of OPEC, a move that could leave a leadership vacuum at the cartel and stifle cooperation. Such infighting occurred when OPEC last sought to appoint a secretary general, 14 months ago.

During that leadership stalemate, OPEC's three largest members, Iran, Iraq and Saudi Arabia, each refused to withdraw their candidates. Rodriguez ultimately got the post. Rodriguez's departure heightens the potential for internal strife within OPEC. A lack of cohesion has been at the root of OPEC's failure to agree to (or abide by) output quotas in the past.

Other Factors

Russia also remains

a factor in the supply-and-demand equation. The world's second-largest oil producer has repeatedly announced its intention to increase its output, and it said last week that it will increase Q3 production by 15%. Any shortfalls spurred by the ongoing conflict in the Middle East likely will be made up by Russia, as well as by Norway and Mexico.

Meanwhile, the American Petroleum Institute said gasoline inventories are running 6% higher than last year, a figure that rose above last week's 5.3% surplus.

And a weaker dollar is also a factor. As the dollar weakens, oil becomes relatively more expensive, lowering demand.

The fundamental picture points to an extension of the developing downtrend, favoring shorts. Looking at the chart, crude, after striking another one-month low on Wednesday, May 29, popped higher and closed into resistance marked by the 38.2% retracement of the decline off the high and previous congestion at the $26 level. The initial downside targets are $24.40, then $23.60. Similar patterns exist in heating oil and unleaded gasoline.

Other Markets

July corn (CN2:CBOT) reversed at the 61.8% retracement of its May run-up, powering higher Tuesday in an outside bar. On Wednesday, corn closed at a one-week high after the Agriculture Department found less than half the current crop to be in good condition. These are developments suggesting a reversal in the prolonged downtrend in corn.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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