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Schork Oil Outlook: Is Inverse Correlation Broken?

Energy prices were mixed last week. The liquids were strong due to outages at the UK’s largest oil field and a strike in France spreading to six refineries. Interestingly, the dollar rose on Friday but this did nothing to temper the bulls; is the inverse correlation broken? Meanwhile natural gas prices kept dropping despite strong fundamentals. As far as this week goes, can Wall Street keep chanting ‘Buy oil, sell gas’?

Henry Hub Natural Gas… BEARISH. Last week, the natty contract tanked for reasons unknown, but most definitely not fundamental. We stated in last Monday’s issue of The Schork Report, “With seven trading days until the contract for March delivery expires, we would expect a break past either end of our Confidence Interval (CI) to indicate trend”, and the contract closed Friday at 5.044, just below the lower bound of our (5.095, 5.868) confidence interval.

This is a very bearish signal and thus this week’s confidence interval for the March contract comes to (4.849, 5.247). With just three days until the contract expires we would expect these bounds to act as significant support/resistance points as technical traders step in to reverse overselling/buying. But if the bears can maintain momentum, the coast is clear towards the lower bound of our CI for the April contract, which comes to (4.454, 5.741).

Further out, the average CI for 2010 has been revised from (4.524, 7.334) to (4.279, 6.740). As far as this week goes, weakness below the week ending Nov 06th’s pivot of 4.755 alerts to offers towards our 4.609 inflection low. Below here the bears should look for offers to our 4.138 intra-week. On the other hand, a rebound above last week’s 5.284 pivot high opens the door to our 5.479 upper inflection point. Above here the bulls should run to our 5.878 intra-week.

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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.