Schork Oil Outlook: Crude Lacks Any Real Direction

ENERGY PRICES WERE WEAK ON MONDAY… liquids markets in London and New York followed global shares lower… As such, there were no safe harbors for the oil bulls to take shelter. Meantime, gas bulls in New York flubbed an opportunity to parlay Friday’s strong close.

When crude oil peakedat $147 last summer, it cost 6 barrels of “black gold” to purchase one ounce of real gold. This ratio was the tightest it had been since WTI crude oil started trading on the NYMEX. Since that time, we have witnessed the collapse of crude oil as we watched the ratio rise to 25 barrels of crude per one ounce gold in January. Historically speaking, the ratio does not spend considerable time in between the extremes. In other words, when money shifts out of one and into the other, it happens quickly. Gold has been the commodity of choice for ETF investors, but its future outlook is questionable. This intercommodity ratio is on the move once again and currently stands at 17.5 barrels per ounce. Market participants are shifting out of gold and into other commodities like crude oil.

For the third week in a row, NYMEX crude oil has shown no real direction. Crude futures for the May contract ended last week at $50.33 which is down about $2 from the previous week. This small drop in crude gave DTO a little bullish momentum to end its week up almost $14. Last Thursday’s report by the U.S. Labor Department stated that jobless claims were down for the first time since January but are still at a 25-year high. These reports show the yin/yang of the economic recovery process, i.e. while we have some “good” news; the overall picture is still grim. This leads to low volatility and trading within a tight range which hinders the ability to take any long term positions.

It appears the market is taking a cautious view with regard to coal and therefore to the components that make up KOL, which includes Joy, Peabody, Consol et al. Given the White House’s rather belligerent rhetoric towards dirty Btus… a cautious view is certainly warranted. As far as the technical outlook for KOL goes, the market ended last week at $16.41. We expect to see considerable resistance up in between the 38/50 percent retracements from $19.16 to $23.85.

KOL’s holdings are feeling the pinch as steel demand is low, electricity usage is down, and coal competes with low natural gas prices. The short term fundamentals for KOL have the obvious poor demand issues to deal with. However, the Carbon Credit market is evaporating, clearly a sign that Obama has thrown in the towel on the Cap and Trade. While last week’s earnings from Peabody disappointed some analysts, their first quarter net income nearly tripled.

News of waning demand from India, increasing scrap gold supplies, and of course a teasing of IMF sales have the Gold Bugs (aka “GB’s”) feeling like they were stung last week. It was only two short months ago that the GB’s were buzzing as futures broke out above $1,000. The nightly endorsements of GLD helped pump money into this ETFand it rose to record levels and holdings. Unfortunately, the enthusiasm at the four digit handle caused them to overlook the fact that the market was making a double top. As the GB’s were mesmerized by Fast Money’s bullishness, the shorts were thinking “Easy Money”. In reality, the GB’s were the masters of their own demise.

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