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“Let me never fall into the vulgar mistake of dreaming that I am persecuted whenever I am contradicted.”
                                    Ralph Waldo Emerson

Commentary & Analysis
Smokin’ … Or Smoke & Mirrors? There’s something peculiar about crude oil …

Last week’s crude oil inventory drawdown is not bullish. From Reuters yesterday:

U.S. crude oil stocks showed a sharp, larger-than-expected decline last week as imports fell, while gasoline stocks posted a surprise drop, weekly data released on Tuesday by the American Petroleum Institute showed.

Domestic crude stocks slipped 5.5 million barrels in the week ended June 3, according to the report, compared with analysts’ forecast of a drop of 300,000 barrels, on average.

The big reason for the unexpectedly sharp drop – a leak in the Keystone pipeline system, which has now been reopened.

Sure, that’s short-term stuff. But why has crude oil risen over the last couple quarters? We are frequently given a couple reasons: quantitative easing, a falling dollar, growing demand, supply threats, the Chinese now buy lots of cars.

Ok, fine. Those are all factors that go into determining the market price of crude oil. For starters, I am concerned about how ‘growing demand’ might be impacted in the coming months (I see potential bearish developments here). But something that has struck me as odd since the beginning of the year was the supply situation.

We have been well-supplied with crude oil for many months. Even during the height of the Middle Eastern uprisings, the world has had access to sufficient amounts of oil. I’ve made note of this several times in my Commodities Essential newsletter that I launched at the beginning of March. And I’ve been waiting patiently for the right time to play this “irregularity.”

In the news now is the request from the IEA for OPEC to increase supply targets. Even though spare capacity is relatively high, they feel that more supplies will be needed for the second half of 2011. From Bloomberg yesterday:

OPEC had 5.94 million barrels a day in spare capacity in May, down 2.7 percent from April, based on Bloomberg estimates. Spare capacity was 6.31 million barrels a day in March, the highest level since May 2009.

The U.S. Energy Department raised its forecast for global oil consumption for this year to 88.43 million barrels a day from 88.08 million in May, according to its monthly Short-Term Energy Outlook, released today. It cut its oil-price forecast to an average $101.91 for 2011 from $102.67 last month.

Just recently the folks at Elliott Wave put together a nice snapshot of crude oil’s supply/price dynamic – so here’s a hat tip to EW:

But here are the facts. Below are two charts taken from the Energy Information Administration’s website: Top chart plots Crude Oil Stocks (i.e. available supply, in million barrels) since July 2009; bottom chart shows Crude Oil Days of Supply since July 2009.

As you can see, while crude oil prices rallied from $50 per barrel (in 2009) to $108-plus per barrel (in April 2011) — both supply and reserves of crude oil ROSE. Reuters reports that in May, US stockpiles of crude reached their loftiest levels since 1990.

In other words, as oil supplies and reserves were rising, so were prices — the opposite of what the traditional supply-and-demand understanding of commodities says should have happened.

Worth noting … that’s for sure! Below is a daily chart of crude oil …


  • Below its 50-day moving average (center blue line) for over a month
  • Back below its 100-day moving average (green line)
  • Failure to test near-term resistance (roughly $105)