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Schork Oil Outlook: Traders Dilemma—How to React to Chaos in Cairo?

Tuesday, 1 Feb 2011 | 9:23 AM ET

Since switching our bias in the liquids and gas two Fridays ago the markets have been on a rollercoaster… more so than usual.

In last week’s Schork Reportwe noted our bearish position in natural gas was benefitting from the market’s inability to rally despite severe weather related gas furnace demand. As such, we continued to sell in to the weakness. Why not? A market that cannot rally on bullish news is not a bullish market.

We are now at the coldest stretch of the winter, thus time-decay now works against the bulls. In this vein, we have no reason to alter our view… outside of the occasional short-squeeze or the chance of a severe, yet brief weather event, gas bulls will be up against, it, this year. Therefore, as far as we are concerned, rallies are to be sold.

As far as crude oil goes, last Friday morning we were sucking wind on our length. We started buying in the high $80s and ramped up our length in the mid $80s on the proposition that support in between $85 and $83 would hold.

In hindsight we were right… thanks to the unfolding chaos in Egypt. As such, we know a gift when we see one and we have been scaling out of our length over the last two sessions. With the events in Egypt still simmering we are hesitant to liquidate our length completely or… gulp… reverse and get short.

With that said, we envision our next move in crude oil will be to sell. Whether that happens today, in one week or in one month remains to be seen.

With Brent crude oil futures now trading above $100we imagine some soothing rhetoric from OPEC will be forthcoming soon. NYMEX crude oil dropped 4½% through the first four sessions last week after the Saudi’s oil Minister, Ali al-Naimi, was quoted saying he was “optimistic” prices will be stable. With NYMEX oil spiking by more than 8% over the last two sessions we doubt this is the kind of stability al-Naimi had in mind.

As analyzed in today’s issue of The Schork Report, with Egypt’s future hanging in the balance, we are not comfortable shorting oil… yet. On the other hand, the bulls have had a terrific run since Friday, but as soon as the market is able to glean some clarity with Egypt, it will most likely drop like a stone.

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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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