Crude Oil Correction

The correction in the Crude Oil futures market finally began this week but now everyone is wondering; is it over already? By my estimation we still have a few dollars to correct to the downside before we think about climbing to the new psychological upside target of $80.00 We may not see this correction in the next week as the international issues seem to keep stealing the headlines week after week. This “geo- political” (the new catchphrase) focus has many traders ignoring some of the latest news on the domestic front unless it’s bad of course.

The latest DOE report showed that inventories for Crude Oil and Unleaded declined less than analysts expected and both are in the upper end of the ten year spectrum. The big number to watch in my view is the Gasoline output which jumped to a two month high of 8.5 million barrels a day. This is a sign that the refineries are finishing up their seasonal turnarounds from heating oil to Unleaded production.
President Bush jumped on the seen a little late in my view but nevertheless he’s in. He basically gave the refineries the ability to ignore the mandated switch to ethanol as an additive and called on the Governors to come together and find a common blend that could be used in each of their States. He also suspended the deposits into the SPR indefinitely which is a drop in the bucket compared to overall consumption. This is viewed more as symbolism than substance but nevertheless is seen as a move that could help the psychology of the energy market make the shift to selling rallies instead of buying dips.
Iran obviously has the ability to ruin this domestic Kumbaya and it looks like they are doing everything in their power to make that happen. The IAEA reported to the U.N. on Friday that Iran is enriching uranium and is continuing related activities in defiance of the council (no kidding?). The big question here is whether or not anyone would even dream of sanctions on Iranian oil or if Tehran would consider stopping exports in protest. These are big “if’s” and only time will tell what the outcome will be in this face off.
In the meantime we are maintaining our put option position in Crude Oil. I am still expecting the market to retrace further to the 65.00 – 67.00 over the next couple of weeks before we can expect a move higher. With international affairs in their current state, driving season and hurricane season on the way I have to remain the longer term bull.
Natural Gas did not follow through on its promising move to the upside but rather it crashed through support below 7.000 and didn’t stop until it reached a one year low of 6.555. Now I’m still not convinced that this isn’t a shakeout down here but if I were trading futures contracts I would have been stopped out early in the week. Unless prices soar early on next week we will be salvaging the premium that’s left in our most recent natural gas option spreads. Matt Odom 4-28-2006

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