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Schork Oil Outlook: Bears Threaten Psychological Support at $70

Bears looking calm, cool and collected.

Weekly unemployment insurance claims are trending higher, consumer confidence is trending lower and the expiration of the home buyer tax credit: All were contributing factors to last month’s record 27.2% plunge in sales of existing homes to the slowest pace, 3.83 million units, since 1999, according to numbers from the National Association of Realtors (NAR). (Read a second opinion — Mark Zandi: Housing in Double Dip)

July’s month-on-month 1.43 million dive in home resales reflected waning momentum in the overall economy as weakness was recorded in all major market areas across the country. Sales in the Midwest fell 35%, followed by a 29½% drop in the Northeast, 25% down in the West and 22.5% in the South.

Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12½ month supply at the current sales pace and 6½ months above the industry understood supply/demand equilibrium of 6.0 months of supply. Inventories were up 40% from June.

The poor headlines regarding housing pick up where last week’s sour economic headlines left off and likely played a hand in yesterday’s weakness in the energy complex.

As noted in the August 16th issue of The Schork Reportregarding the pullback in Nymex crude oil, the selloff from 82.55 to 75.39 was the “easy part” for the bears, but now they would have “…to step up and play the varsity. To wit, we expect to see solid support from this point on as bulls scramble to defend. After all, if they don’t, then we next have to start talking about sub $70 spot crude oil.”

Since then, the bears have broken that support, rather easily, and are now threatening psychological support at $70. The market has declined in 13 of the last 15 sessions and dollar-volatility has dropped in accord, from around $2.39 to $2.09. Thus, it is time to start talking about sub $70 oil. At this point, all it will take is one more disappointing headline (Durable Goods, New Home Sales, DOEs) and/or dollar strength for oil to get to a $6-handle.

At this point the bears would then be in position for a run at the lows, mid $60s, seen in May.

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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.

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