Schork Oil Outlook: Bearish in the Short Run

As U.S. energy markets approach the Thanksgiving holiday this Thursday liquidity will begin to evaporate. In the meantime crude oil bulls in New York appear to be caught in a virtual purgatory between congestion from October around 82.87 to 83.44 and support out of September from 78.90 to 77.81.

The Schork Report is currently holding a bearish view in our daily bias alert for oil. Be that as it may, the bulls have been able thus far to establish a floor below $81 in the January Nymex WTI market.

If you are bearish in the short-run, like we are, that is not good. After all, markets follow the path of least resistance. Therefore, we now run the risk of bearish momentum flaming out.

For instance, yesterday the market bottomed at 80.68, but rallied more than a dollar into the close. Last Thursday the market sank to 80.92, but then rallied over $82 and before that on Wednesday the market sold down to 80.65 (i.e., 3 cents below yesterday’s low) but finished back above $81. The average of these three low prints is 80.75.

"Now, what is your potential reward? Hint: it is greater than 1.57." -The Schork Report, Stephen Schork

This price action is not unlike the path we saw back in mid-October. Over a three session span, from the 19th to the 21st, the January contract posted lows of 80.58, 80.63 and 80.89 for an average of 80.70. Needless to say, the bulls are going to lean against this support.

Regardless of our discussion re the MDI, it is the right thing to do. After all, their risk is limited. Why not buy sub $81 now? The market is now stuck in what our friend Dennis Gartman dubs “the box,” the 50/62% retracement (03-May to 25-May) from 82.68 to 80.17. Last night the market settled at 81.74 or 1.57 from the bottom of “the box.” There is your risk.

Now, what is your potential reward? Hint: it is greater than 1.57. After traders tired last month of pushing against resistance below $81 they reversed tactics and to their delight they discovered resistance was light. As such, over the next three weeks they bid the market to an 89.11 high print for a 10½% return (peak-to-trough).

Now we all know that history does not offer a guarantee of future performance. Fair enough, but if the bulls were able to bid the market up by 8.52 a month ago then who is to say they cannot do it again?

The only question now is… is that worth risking 1.57?

Here at The Schork Report, we are considering it.


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.