September 23, 2009

Crude Oil:  This week we closed up $2.75 at $72.04. We have a Sell Signal as of now. The market has not been able to take out $75. Until it can take out $75, we should maintain a negative view on the market. It should have advanced to new highs in the upper $70’s, or low the $80’s, but it failed to do that. Upside momentum ran 26 weeks but has now turned negative and this bull market look to be over. As this market in Crude Oil stalled and broke the product prices have fallen more and that has caused the Crack Spreads to decrease dramatically. Crack Spreads ultimately determine the price for Crude Oil. With the Cracks now down at low levels the price picture for Crude Oil is poor. The Heat Crack, over 4 weeks, fell 68% from 25.81 to a low of 8.10 cpg and remains 3.17 cpg from the low. This is a very bad sign as we begin Heating Oil season. The Gas Crack has fallen 72% from its high of 36.22 cpg from 4 weeks ago. With the Crack Spreads weakening to this degree, and to these levels, we should expect the bid for Crude to weaken also. When the Crack Spreads break this much, and this quickly, what normally happens is that Crude Oil is very susceptible to price weakness. This is a bad scenario for the bulls to have to look at. Heating Oil must gain strength right now, with Gas season over, or the price for Crude can break sharply on any problems. If the HO Crack does not gain strength, the Crude Oil market will weaken and it can weaken very sharply on any more losses in the Crack Spreads. If this is a bear market, we will break under $67.50 and that will set up a test of the $59.52 swing low. If prices then fall below $59.52, we should head down to the $45 area or lower. There is a reasonable possibility, under certain circumstances, that we will test the lows at the $34 level. If this happens, the probable caused will be a mild winter. This will cause distillate demand to be unable to increase, by any significant amount, as Gas demand also drops. If this happens, product prices will probably decline more than Crude prices. Then the Crack Spreads will then collapse down to very low levels, probably down to the 0-5 cpg range or lower. That could cause the 3:2:1 Crack Spread to head down to 1.50 cpg, the all time low. That then will put Crude Oil at great risk of going into a total collapse mode. The refiners will drop the Crude Oil bids sharply and quickly to try to offset the price decreases in the products. It takes right around $5.00 a barrel, (12.50 cpg) to run a refinery at breakeven. The current margin on the 3:2:1 Crack is now 11.72 cpg, just about breakeven. Thus, Crude Oil is very vulnerable to any declines in the products. If the products start to break then the refiners must drop their bids quickly to maintain a breakeven at current rates. This can then cause us to enter a price scenario that is a race to the bottom. If products weaken sharply so will Crude Oil. Major weakness in price will pop up if demand does not improve for the products. Crude Oil inventory is 41,047,000 million barrels above last year. If we continue to process at the current high rate, we will have more than ample supplies. Currently we are exchanging Crude inventory for product inventory and creating a super glut. We have a huge shortage of demand, especially in Distillate. The Crack Spreads have collapsed, but production has not. We need the refining run rate down to 75%, this week it was 86.94%.