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Schork Oil Outlook: History Favors Bulls

Drillers will have to navigate through a minefield this summer.

To no one’s shock or awe, President Obama reversed his decision from two months ago to allow oil drilling off the Virginia coast. In his press conference yesterday the president also extended the moratorium on new deepwater drilling permits for six months and postponed Shell’s plan to drill exploratory wells off the Alaska coast.

Thus, while it appears that BP’s ‘top kill’ operation might have temporarily worked, the long-run implication from this event on future domestic oil E&P is in serious doubt.

Meantime, the National Oceanic and Atmospheric Administration (NOAA) published its 2010 Atlantic Hurricane Season Outlook. The agency is forecasting what could be the busiest season since 2005 (the season of Dennis, Katrina, and Rita et al.).

NOAA is officially making book at 3/7 (i.e. 70%) that the U.S. will see 14-23 named storms of which 8-14 will develop into hurricanes and 3-7 of these hurricanes turning into major hurricanes (equal to or greater than Category 3).

  • Crude, NatGas, RBOB Gasoline Futures

Thus, between the White House and the hurricane season, drillers will have to navigate through a minefield this summer. That is seemingly bearish… right? At least to us it is. Be that as it may, the dollar sank yesterday— which is as often the case these days—translated into a surge for crude oil and by extension, a surge for the complex in general.

To wit, the AMEX Oil Index jumped by 5.4% yesterday to 981.68 and the Philadelphia Oil Service Index rose by 2½ % to 181.52. At the same time the CBOE OVX, 40.25, dropped to a two-week low.

Bottom line, Nymex WTI is now entering a critical area of resistance. Last night the spot July contract traded into (but failed to close inside) the 50/62% retracement area (ratio scale) in between 74.82 and 77.57. What’s more, the 200-day moving average (which now has a positive slope) settled at 76.64. In other words, this is the top of the range, the bears must defend this area. If they fail, the path back to the mid $80s is wide open.

The Schork Reportcautions traders to keep in mind that the bulls have (recent) history on their side. The last three times (Sep’09, Dec’09 and Feb’10) WTI traded down into the mid/high $60s momentum stalled and the market rallied back into the $80s. So it bears repeating, the bears must defend 74.82/77.57 or history will likely repeat.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.