What started out as some mild profit taking for oil bulls yesterday morning segued into an avalanche of offers by the afternoon.
The catalyst appears to be a research note that was put out by Goldman Sachs stating that the bank was exiting its CCCP Basket (40% of which was comprised of Nymex WTI crude oil for December 2011 delivery). Two of the reasons cited by Goldman for closing the position — demand destruction and speculative length — were already givens in the market.
To this effect, as of a week ago today, Goldman and all of their speculative (delta) buddies, owned enough crude oil on the Nymex to offset 9 in 10 barrels of the 293 MMbbls of sweet crude oil (<=0.5% sulfur) sitting in the Strategic Petroleum Reserve (SPR).
As far as demand goes, yesterday the IMF lowered its growth forecast for the U.S., citing the rise in oil prices prices as the main driver. Furthermore, today’s Chart of the Day complements yesterday’s chart. According to the monthly numbers from the Bureau of Economic Analysis (BEA), personal consumption expenditures (PCE) gasoline in February hit a post-bubble high of 3.97%. Should crude oil remain on a bullish trajectory, than it is conceivable that PCE could reach 4.5% by summer.
That is significant. As illustrated in today’s issue of The Schork Report, PCE on gasoline above 3.5% slows demand. PCE above 4% invites demand destruction and PCE at 4.5% invites material demand destruction.
The other event of note that occurred yesterday was the outside reversal day in spot Nymex WTI. The contract for May delivery opened Monday above Friday’s 113.21 high print and hit a fresh 31-month high of 113.46. The contract finished the day below Friday’s 110.11 low print, thereby engulfing Friday’s (rather considerable) $3.10 trading range.
An outside reversal day, on a day when the market hit a fresh 2½-year high is not insignificant. It is a potential telltale that a reversal is nigh. We have already taken out last week’s high print. Last week’s low print is 107.50. A close this week below that level would form an outside reversal week.
We are cautiously optimistic for our beleaguered bearish bias. A close this week below 107.50 would brighten our spirits immensely.
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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.