Schork Oil Outlook: Bearish on Nymex—Until Dollar Says Otherwise

Bearish review...

It has been two weeks since analysts here at The Schork Report switched our technical daily bias in the Nymex liquids from bullish to bearish. In the aggregate we have been correct, but we are not yet convinced the bears have what it takes for a significant sell-off… especially in light of the strong negative correlation with oil prices and the value of the dollar (see QE2).

Before we go into the liquids, let’s first update the natural gas market. This one is easy; the market is as bearish as ever, i.e. down 26%. Since moving to a bearish bent on August 06th the contract for November delivery has dropped in 30 of 50 sessions (60%) with average losses coming to 2½ cents per dekatherm, per session. Thus, for the time being, we see little reason to alter our bearish view.

The liquids markets have not been nearly as convincing, however. Since switching to a bearish bias on October 04th the spot crude oil contract for November delivery has closed lower in 6 of 10 sessions with an average loss of 3.3 cents per barrel per session.

Be that as it may, before correcting lower we had to endure a couple of sleepless nights as the market rallied 3.3% above the high from whence we switched our bias.

As we turn our attention to the December contract the market’s price path over the last two weeks has been defined by higher highs and higher lows, BUT with lower settlement prices. As such, the market appears confused at the moment.

Spot November heating oil has also closed lower in 6 of 10 sessions with average losses of 0.63 cents per gallon, per session. Most importantly, this downward trend has been accompanied by lower highs and lower lows. As such, as far as the liquids go we are most comfortable with our bearish bias in this particular market.

On the other hand, spot gasoline is bucking the bearish trend. The RBOB contract for November delivery (15.0 lb.) has closed higher in 6 of 10 sessions with average winnings of 0.18 cents per gallon, per session. This upward trend has been accompanied by higher highs and higher lows.

As far as the second winter-grade contract goes, RBOB for December delivery has also been trending higher, i.e. 6 of 10 sessions, but the magnitude of those 4 losing days exceeded the 6 winning days. Thus, even though the December closed higher at a 1.5 to 1 ratio, the contract is down on average by 0.054 cents per gallon per session.

Bottom line, for the time analysts at The Schork Report, are maintaining our bearish view on the Nymex, but given the direction of the dollar, we reserve the right to change that view in the blink of an eye.


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.