Thursday Oil Market Round-Up

On the weekly chart, note the following:

-- Prices are below all the SMAs

-- The 10 and 20 week SMA are both headed lower

-- The 10 week SMA has crossed below the 50 week SMA

-- The 50 week SMA is turning sideways (and will start moving lower within the next few weeks).

Bottom line: this is a bearish chart



On the daily chart, notice the following:

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

-- Prices have been dropping for about three months

-- Prices are using the 20 day SMA as technical resistance

Bottom line: This is also a bearish chart.

Thursday Oil Market Round-Up

On the long-term chart, notice the following:

-- Prices are resting on the long-term trend line. That means despite everybody being thrilled about lower oil prices, the uptrend that started a little over a year ago is still in place and can be resumed at any time.

-- The 10 week SMA is about to move through the 20 week SMA. Because this is a weekly SMA it takes longer to move. However, that makes a move that much more significant.

-- Prices are below the 10 and 20 week SMAs, which will keep these SMAs under downward pressure.



On the daily chart, notice the following:

-- Prices have broken through the downward sloping trend line established at the beginning of the correction, indicating a trend reversal.

-- The 10 day SMA is turning the corner and will cross over the 20 day SMA

-- Prices are trying to move above the 10 and 20 week SMA, although they are not there yet.

Thursday Oil Market Round-Up

The P&F chart is very revealing. Looking carefully at the rally that led to the recent top in oil prices we see a clear pattern of rising bottoms and tops. Prices continually broke through key levels of upside resistance and then moved lower, consolidating gains.

Now look at the the last three columns. Notice we may be in a period where the market makes lower lows and lower highs -- a bear market pattern. Now, this is still very early in the correction so making bold predictions is pointless. However, it's also important to be aware what the chart may be saying in order to keep an eye out in future price movements.



On the weekly chart, notice the following technical developments:

-- Prices have moved through the 10 and 20 week SMA

-- The 10 week SMA has turned negative. Because this is a weekly number it takes longer for trends to develop. Therefore, this number turning negative is a significant development

-- Prices are at a technically important level, bumping into the upward sloping trend line that started a year and a half ago



On the daily chart, notice the following:

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The 10 and 20 day SMA have moved through the 50 week SMA

-- The 10 week SMA has provided upside resistance in the latest market sell-off.

The real question now is what is happening -- why are prices dropping like they are? It seems like a few weeks ago we were looking at record oil prices (and it was just a few weeks ago).

There are several reasons for the drop. The first is the realization that high prices are taking a bite out of demand. Note the following developments that have lowered demand:

"It looks like the high price has done its job in destroying demand," said Muhammad-Ali Zainy, senior energy economist at the Center for Global Energy Studies in London.

China reported Monday that its crude imports swooned 7% in July to a seven-month low. The Chinese government joined several other Asian nations in June, gently loosening federal subsidies to refiners and raising caps on retail gasoline prices.

Also consider this news from the US (hat tip: Calculated Risk):

Americans drove 4.7 percent less, or 12.2 billion miles fewer, in June 2008 than June 2007. The decline is most evident in rural travel, which has fallen by 4 percent – compared to the 1.2 percent decline in urban miles traveled – since the trend began last November.

Also consider this overall drop in US demand:

U.S. consumption fell by 800,000 barrels a day in the first half of '08 vs. the prior year, the largest drop in 26 years, the Energy Information Administration said Tuesday.

In addition, there has been an increase in overall supply:

The International Energy Agency said Tuesday that production rose nearly 900,000 barrels a day in July, bringing supply and demand, for the time being, into what appears to be a balance.

However, let's not forget the big picture (hat tip, the Big Picture):



In other words, the overall supply/demand situation is still very much out of whack and will be for some time.

Thursday Oil Market Round-Up

On the weekly chart, we can clearly see the bull market run that started in early 2007. Prices continued to move higher, breaking through resistance levels and then consolidating gains. There are two legs to this rally. The first occurred throughout 2007. This one ended with a sideways rectangle consolidation pattern that lasted about three months. The second move came during 2008. But that move is over. Notice that prices have broken through the trend line that supported the 2008 rally. Prices now stand at the 20 week SMA.



On the daily chart, notice the following:

-- Prices have broken the support line

-- The 10 and 20 day SMA are moving lower

-- The 10 day SMA has moved through the 50 day SMA, and the 20 day SMA is about to

-- The 50 day SMA is leveling off

-- Prices are below all the SMAs

This chart is now short-term bearish and longer term neutral.

Thursday Oil Market Round-Up

Big news in the oil market this week.



One of the biggest advantages of P&F charts is they clearly show important price levels. On the above chart, notice that 132 was a very important support level and that prices moved through that price this week.



On the daily chart, notice the following:

-- Prices are below all the SMAs

-- The 10 and 20 day SMAs are both heading lower

-- The 10 day SMA has crossed below the 20 day SMA

-- Prices have broken the trend line that started in early April



And finally we have the weekly chart. While the long-term upward trend line started in early 2007 is still firmly in place, the rally that started at the beginning of this year has clearly been broken. Prices are resting on the 20 week SMA and the MACD is overbought. This is a chart that is clearly correcting.

Thursday Oil Market Round-Up

FYI: I'll be on KTLK today at 11:30 CST to talk about the economy.

Lots of interesting action in the oil market over the last few days. The primary reason is the news contained in the weekly oil market report along with a sluggish economy:

Futures have dropped $10.58, or 7.3%, over the last two sessions on concerns that a prolonged economic downturn in the U.S. will leave a hole in oil demand too big for growing Asian economies to fill. Oil prices remain up about 80% from a year ago, however, and the market has recovered from proportionately larger downward corrections this year.

Stockpiles of crude oil and gasoline as reported by the U.S. Energy Information Administration rose unexpectedly in the week ended July 11. Distillates, a category of fuel that includes diesel and heating oil, increased by twice as much as expected.

Oftentimes rising inventories signal faltering demand.

"This is about as straightforward a set of bearish data as we're likely to see," said Tim Evans, an analyst with Citi Futures Perspectives.

Sluggish growth and record oil prices have translated into a 2% drop in U.S. gasoline demand this summer. Gasoline futures have tended to lag behind crude, while heating-oil futures, acting as a stand-in for world-wide diesel demand, have seen bigger gains. Refiners responded by turning a record 30% of their production over to distillates last week. Growing inventories are the result.

I should add: this is one week's report. While the news is bearish, it is still one week's report, in a series of trends. Another way to look at this situation is the market needed a reason to take profits and this week's news gave the market the reason to do so. If we see a few more weeks news like this, then we can say things may be changing. But right now we have a single data point which is counter to a whole series of data points.

Let's go to the charts to see what all of this means.



Yesterday prices broke the upward sloping trendline that started in early April. Now there are two important points to make:

-- The amount of the break is small. In his book on technical analysis, Pring uses a 2%-3% rule, meaning prices have to break a trend by a specific amount. This allows for daily fluctuations and in general is a good rule.

-- Will the trend break continue? If we continue to see prices move lower or sideways, then we can say we've got a definite change in psychology.

In addition, note the following:

-- The 10 day SMA has just turned downward

-- The 20 and 50 day SMAs are still moving higher

-- The shorter SMAs are still above the long term SMAs

-- Over the course of this rally, note that prices have corrected between the 20 and 50 day SMA.



On the weekly chart, notice that prices are also on the verge of breaking through support. However -- this is a weekly chart, and the week isn't over yet. That means the bar could change over the next few days.

Also note the following:

-- The shorter SMAs are above the longer SMAs

-- All the SMAs are moving higher

-- Prices are right at the 10 week SMA

In other words, there are still a lot of technically bullish signs on this chart



On the PF chart, notice the following:

-- The chart added two more o's yesterday, meaning prices are moving lower.

-- BUT -- note there is strong price support at 132.

To sum up, we have two days of a sell-off caused by a single report. We have a long way to go before we're in correction territory. But we mush also be aware that new information which runs counter to the prevailing sentiment and perception is out there as well.

Thursday Oil Market Round-Up

First, sorry about missing the market recap yesterday. I had a ton of things come up that kept me from blogging.

Now, onto the charts.



This is a weekly chart that I use yesterday to demonstrate US car companies are run by idiots. However, it's important to remember we're in the middle of a multi-year bull run in the oil market. In short, this didn't just start; it's been going on for some time.



On the shorter weekly chart, notice the market has been in a rally since he beginning of 2007. The market has continually moved through resistance areas to make new highs and has consolidated gains at various times. Also note that prices are above all the SMAs and all the SMAs are moving higher. In short, this is a great example of a bullish chart.



On the daily chart, notice we have the exact same thing -- upward moving prices that are continually moving through areas of resistance to make new highs. Prices are also consolidating gains. Finally, prices are above all the SMAs and all the SMAs are moving higher. In short, this is also a great example of a bullish chart.



On the P&F chart, notice oil has continually made news highs. Again -- this chart is a great example of a bull market chart.

Let's look at gas at the retail level:

After a one-week respite, the U.S. average retail price for regular gasoline increased to a new record high, moving up 1.6 cents to 409.5 cents per gallon. Prices rose throughout the country with the exception of the West Coast where the price dipped a bit. On the East Coast, the price went up a cent to 405.7 cents per gallon. In the Midwest, the increase of 3.5 cents was the largest of any region and pushed the price above $4 for the first time, to 403.1 cents per gallon. The Gulf Coast price remained the lowest of any region and was the only one under $4 at 392.8 cents per gallon, an increase of 0.9 cent. The Rocky Mountain price rose 3.2 cents to 403.4 cents per gallon. Although the price on the West Coast fell, the drop was only four-tenths of a cent to 445.6 cents per gallon. The average in California also declined somewhat, going down 1.2 cents to 457.3 cents per gallon.

However, it's not all bad:



Prices have at least leveled out somewhat over the last few weeks.

However,



Both oil and



Gas stocks are at low levels, adding further upward pressure on prices.

Short version: there isn't any reason to think the bull market will end anytime soon.

One Reason For High Oil Prices

From IBD:

Oil prices swooned after China's National Development and Reform Commission said it will hike the price of gasoline, diesel, aviation fuel and electricity.

The Chinese government lifted fuel prices by 11% in November but had kept them frozen at that level, part of an effort to avoid boosting already-high inflation rates.

Chinese gas prices are well below the levels seen in the U.S. and other nations, thanks largely to heavy subsidies. The government said it would lift some of those subsidies, effectively boosting prices by as much as 18%.

Scorching demand in China for refined crude products has been one of the biggest drivers of the global surge in crude prices. Thursday's announcement of higher prices in China sent the price of U.S.-traded crude oil falling sharply. July crude dropped $4.75 to $131.93 a barrel.

Keep prices at an artificially low lever and you'll also keep demand at that level. Raise prices by removing the subsidy and you'll see demand drop.

The interesting question is why is China doing this now? They have more than enough currency reserves to maintain the subsidy for the foreseeable future. In addition, they have experienced a fair amount of civil unrest lately which this decision is not going to help. Finally, this is right before the Olympics which many people are speculating Beijing will use as its official "coming out" party on the world stage. So, again, we ask the question: why now?

More Upward Pressure on Oil Prices

The following charts are from This Week in Petroleum."



Oil inventory is at the lower end of its historical range.



Gas stocks are at the low end of their historical range.

As a result of lower supplies....



Gas prices are at record highs, as are



Diesel prices.

Consider the following news from the same report:

The U.S. average retail price for regular gasoline moved up to yet another record high. The jump of 4.3 cents was the twelfth consecutive weekly increase, bringing the price to 408.2 cents per gallon, a surge of 82.3 cents since March 24. The average price for the East Coast increased 3.3 cents to 405.2 cents per gallon. The Midwest price rose 1.5 cents to 399.7 cents per gallon. The Gulf Coast price grew 2.8 cents to 393.7 cents per gallon, once again remaining the lowest of any region. In the Rocky Mountain region, the price jumped 5.3 cents to 399.4 cents per gallon. The price rise on the West Coast was sharply higher than the other regions, surging 12.7 cents to hit 445.2 cents per gallon. The average price in California soared 15.5 cents to reach a record 458.8 cents per gallon.

Oil Market Roundup

Oil is the 800 pound gorilla in the economic run. Oil prices drip into every area of the economy. As such, they are incredibly inflationary. In addition, oil prices have been negatively impacting consumer sentiment in a big way. In short -- high gas prices are really hurting right now.

Let's go to the charts.



Oil prices have been rallying since the beginning of 2007. They have continually moved through upside resistance and consolidated gains. In addition, the price/SMA alignment is the most bullish possible. Prices are above all the SMAs. The shorter SMAs are above the longer SMAs. All the SMAs are moving higher.



On the daily chart, notice the following:

-- Prices are higher than all the SMAs (although just barely in the case of the 10 day SMA).

-- The shorter SMAs are above the longer SMAs

-- All the SMAs are moving higher

This is a bullish chart, plain and simple.



On the P&F chart, notice that prices have continually made new highs.

The bottom line is this: despite all the price fluctuations we've read about over the last few weeks, oil is still in a solid bull market. In addition, it's going to take a lot for that to change at this point.

Gas at $4/ Gallon

From Bloomberg:

U.S. gasoline rose to $4 a gallon at the pump for the first time, threatening to further shake the confidence of consumers whose spending makes up two-thirds of the economy.

.....

``The fact that confidence has gone down as inflation expectations are going up indicates gasoline has been an important driver because it's one of the reasons expectations are rising,'' Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, said.

Consumers are already rattled by falling home values and a weakening job market, prompting them to curb spending and threatening to halt the six-year expansion. Consumer confidence in May fell to a 28-year low, as inflation expectations rose to their highest in more than two decades, according to last month's Reuters/University of Michigan sentiment survey.

There's only so much strain consumers can take. At some point, they will day, "to hell with it" and stop spending. In addition, at some point, prices will start to really impact overall consumer behavior. In fact, price may already be at that level. For example, in their recent announcement of 4 plant closings, GM stated consumers were walking away from big SUVs in droves and moving into smaller, more fuel-efficient cars. Because of the importance of car purchases in the consumer budget this is huge news and could signal an incredibly large shift in consumer behavior.

Let's add to that predictions like these:

Oil prices are likely to hit $150 a barrel this summer season, the global head of commodities research at Goldman Sachs said on Monday, as tighter supplies outweigh weakening demand.

"I would suggest that the likelihood of that happening sooner has increased tremendously ... sometime in summer," Jeffrey Currie told an oil and gas conference in the Malaysian capital, referring to oil at $150 a barrel.

Goldman Sachs, the most active investment bank in energy markets and one of the first to point to triple-digit oil more than two years ago -- a once unthinkable level -- said last month oil could shoot up to $200 within the next two years as part of a "super spike."

Thursday Oil Market Round-up

Oil has been correcting a bit over the last week. Overall this is good news. But before we pop the champaign cork.....



On the weekly chart, we're still in a solid bull market that started at the beginning of 2007. Prices have continually risen, moving through resistance and then consolidating their gains. Notice the SMAs are all moving higher with the shorter above the longer, prices above all the SMAs and all the SMAs moving higher. Simply put, this is what a bull market chart looks like.



On the daily chart, notice the following:

-- Prices have moved through the trend line started in early April, but the trend line from early February is still intact.

-- Prices have moved through support established in early May.

-- All the SMAs are still in a bullish configuration with the shortest above the longest.

-- However, prices are below the 10 and 20 say SMA and the 10 day SMA is beginning to turn lower.

-- Compare the latest price action to the late March, late April periods and you'll see a lot of similarities. In other words, this looks like a consolidation rather than a correction.



On the P&F chart, notice that prices have moved below previous established support levels in the latest correction. That can be a sign that prices are thinking about correcting. However, considering the overall strength of this chart (notice the multiple new higher highs) it's still way too early to tell if we're near a correcting phase or not.

On the gas price front we've still got an incredibly ugly picture:

The U.S. average retail price for regular gasoline increased for the tenth straight week. Although its upward momentum slowed, the U.S. average price still climbed another 3.9 cents to hit 397.6 cents per gallon. The average for the East Coast went up by 3.3 cents to 397 cents per gallon; but prices in the Central Atlantic and New England increased by more than 5 cents, climbing past the $4 mark to reach 400.1 and 402.8 cents per gallon, respectively. The average price in the Midwest was essentially unchanged, creeping up by only a tenth of a cent to 395.2 cents per gallon. The average price in the Gulf Coast increased by 1.7 cents to 384.6 cents per gallon and remained the lowest of any region. The price in the Rocky Mountain region went up 3.9 cents to 389 cents per gallon. The price for the West Coast extended its upward surge, jumping another 13.7 cents to strike 416.6 cents per gallon. West Coast prices have risen 28.3 cents over the past two weeks. The average price in California went up even more, shooting to 424.2 cents per gallon, an increase of 14.3 cents from the previous week.

Is Peak Oil Becoming the Norm?

From Wikipedia:

Peak oil is the point in time when the maximum rate of global petroleum production is reached, after which the rate of production enters its terminal decline. If global consumption is not mitigated before the peak, an energy crisis may develop because the availability of conventional oil will drop and prices will rise, perhaps dramatically. M. King Hubbert first used the theory in 1956 to accurately predict that United States oil production would peak between 1965 and 1970. His logistic model, now called Hubbert peak theory, has since been used to predict the peak petroleum production of many other countries, and has also proved useful in other limited-resource production-domains. According to the Hubbert model, the production rate of a limited resource will follow a roughly symmetrical bell-shaped curve based on the limits of exploitability and market pressures.

Also from Wikipedia:

Oil depletion is the inescapable result of extracting and consuming oil faster than it is naturally produced, due to the fact that the formation of new natural petroleum is a continuous geologic process which takes millions of years. No one knows for sure when the long-term decline of oil reserves will begin, or what the consequences will be. The Hubbert peak is an influential theory concerning the long-term rate of conventional Petroleum (and other fossil fuel) extraction and depletion. The Hubbert peak is named for United States geophysicist M. King Hubbert, who created a model of known reserves, and proposed the theory. The concept of passing the peak-point, so that society is on the downward side of the oil supply curve, is also referred to as Peak oil or the end of cheap oil. By most projections, this point has already been passed or is about to be at some point between the years 2007 and 2010, although by United States government prediction, world consumption of oil will increase to 98.3 million barrels a day in 2015 and 118 million barrels a day in 2030. This represents more than a 25% increase in world oil production. Many predictions have been made about the potential implications of passing the peak. These estimates range from warnings of a doomsday scenario created by long term lack of growth to faith that the market economy will allow a relatively smooth transition to other energy sources through technological solutions.

Let's simplify the above into classic economics. There is a limited supply of oil. Because India and China have added 2 billion people to the world's roll of active consumers demand is increasing. Put these two elements together, and you get increasing prices -- just like we are experiencing now.

I bring this up because on the front page of today's WSJ there is an article that the IEA is now focusing on the supply of oil rather than demand. As a result, people are far more pessimistic about the oil market.

But the direction of the IEA's work echoes the gathering supply-side gloom articulated by some Big Oil executives in recent months. A growing number of people in the industry are endorsing a version of the "peak-oil" theory: that oil production will plateau in coming years, as suppliers fail to replace depleted fields with enough fresh ones to boost overall output. All of that has prompted numerous upward revisions to long-term oil-price forecasts on Wall Street.

.....

The world's premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields. Its findings won't be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.

.....

For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

Thursday Oil Market Round-Up

Today I'm just going to show three charts so we can look at the long, medium and short term oil markets. Short version: this is what a bull market looks like



Above is a monthly chart. Notice that prices are rising from a base established over 10 years. Here's an old trader's adage for you (which you probably don't want to hear right now). The longer the base, the stronger the run. Also note how prices have continually broken through resistance.



On the weekly chart, notice the following:

-- Prices have continually moved through resistance

-- There is a strong rally in place that started at the beginning of 2007

-- As prices have risen they have taken time to consolidate gains before moving higher



On the daily chart, notice the following:

-- Prices are above the SMAs

-- The shorter SMAs are above the longer SMAs

-- All the SMAs are moving higher

-- There are two solid uptrends in place; one that started in February and one that started in April

When you combine all of these charts you get the following:

-- A strong multi-year chart that shows a rally from a multi-year base

-- A weekly chart with an uptrend that started at the beginning of 2007

-- A daily chart with the most bullish price and SMA arrangement possible

Thursday Oil Market Round-Up

On the daily chart, notice the following:

-- The shorter SMAs are above the longer SMAs

-- Prices are above the SMAs

-- The trend that started in early February is still intact

-- Prices have continually moved through upside resistance



On the weekly chart, notice the following:

-- The uptrend that started in early 2007 is still intact

-- As prices have risen they have moved into 5 separate consolidation areas to absorb the gains.

After the Fed cut rates, oil dropped in response to a rising dollar:

Crude-oil futures fell for a third day Thursday as strength in the dollar reduced commodities' appeal as an investment alternative.

Natural gas futures also fell sharply after government data showed U.S. natural gas inventories rose more than expected last week.

Crude for June delivery dropped 94 cents, or 0.8%, to close at $112.52 a barrel on the New York Mercantile Exchange. It fell to an intraday low of $110 a barrel earlier. June natural gas futures fell 28.2 cents to end at $10.561 per million British thermal units.

Oil hit a new intra-day high on Monday:

Oil futures rose to an all-time high near $121 a barrel Tuesday in Asia, fueled by worries about threats to supply and a weakening of the U.S. dollar.

The surge in oil prices was also fueled by hopes that the U.S. economy will be spared a sharp downturn after the release of data Monday showing an unexpected expansion in the U.S. service sector in April, analysts said.

Light, sweet crude for June delivery rose to a record $120.93 a barrel in electronic trading on the New York Mercantile Exchange. The contract later retreated to $120.24 a barrel, up 27 cents from Monday's close. Crude futures settled on Monday at $119.97 a barrel, up $3.65 from Friday's close.

"The bulls are in control of the market," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "The sentiment is that the oil pricing is likely going to stay quite strong, with a lot of volatility."

Monday's rise was based on the following geo-political hot spots:

Crude futures jumped $3.65, or 3.1%, to an all-time high $119.97 a barrel in New York as traders worried about developments in several key oil-producing countries: Diplomatic tensions between Iran and the West are rising again. Rebels have attacked Nigerian oil facilities in recent days. And Turkey recently conducted fresh strikes against the Kurdish minority in northern Iraq. Many analysts worry that long-simmering rivalry may see reprisals and continued violence this week.

While there are a lot of geo-political problems impacting oil, there is also the basic increase in demand:

Amid the occasional threats to crude supplies, global demand for oil continues to grow. While demand for oil and gasoline has been soft in the U.S., the Chinese and Indian economies are growing by double digits, boosting global demand for oil.

There is growing speculation that oil will continue on higher. Goldman was predicting $200/bbl oil in a recent report:

Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

New York-based Murti first wrote of a ``super spike'' in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009. The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record of $122.49 today on speculation demand will rise during the peak U.S. summer driving season.

``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.

There is also a growing realization that oil's upward climb may continue:

A growing number of oil-market watchers say voters riled by soaring fuel costs may face far worse this summer, as factors ranging from unrest in Nigeria to slumping production in Russia could shove benchmark oil prices over $150 a barrel.

.....

The world's diminished spare production capacity remains the strongest single catalyst for high prices, Mr. Yergin says. The world's safety cushion -- the amount of readily available oil that could be pumped in a moment of crisis -- is now around two million barrels a day, according to most estimates. That's just 2.3% of daily demand, and nearly all of the safety cushion is in one country, Saudi Arabia. Everyone else is pretty much pumping all they can, which makes the world vulnerable to political or other shocks.

And finally, gas prices are moving higher (again).

Once again, and for the sixth week in a row, the U.S. average retail price for regular gasoline moved higher, this time by one cent. As a result, the U.S. average price for regular gasoline set yet another all-time high of 361.3 cents per gallon. While the average price has gone up by 55.9 cents per gallon above the price a year ago, it has also shot up by nearly the same amount (exactly 56 cents) since December 31 of last year. On a regional basis, prices increased throughout the country with the exception of the Lower Atlantic portion of the East Coast where they went down a mere 0.6 cent. Elsewhere on the East Coast, prices increased by 2.5 cents per gallon in New England and 2.3 cents per gallon in the Central Atlantic while the average price for the entire East Coast region was 361 cents per gallon, a 0.9-cent increase. The average price in the Midwest was 357.9 cents per gallon, an increase of 1.1 cents. The increase in price for the Gulf Coast was smallest of any region, going up only two tenths of a cent to 350.7 cents per gallon. Despite an increase of 1.6 cents in the Rocky Mountain region, the price of 349.4 cents per gallon was the lowest for any region. The West Coast price went up by 1.4 cents to 380 cents per gallon, while the price in California increased by 1.1 cents to 390.3 cents per gallon.

Conclusion: there is no reason to think oil won't continue to move higher. The charts are incredibly bullish, demand is still strong, political tensions still exist (in a big way) and supply is tight.

Thursday Oil Market Round-Up

Let's start with the charts.



On the daily chart, notice the following:

-- Prices have twice broken through resistance to make new highs.

-- The shorter SMAs are above the longer SMAs

-- Prices are currently at the 20 day SMA. Prices have dropped through this number before and rallied again

-- Prices have consolidated their gains are each advance.



On the weekly chart, notice the following:

-- Prices have been advancing for over a year

-- After each advance prices have consolidated their gains

-- This is a very bullish chart

Although the oil market dropped last Wednesday, traders pointed to a weak dollar as a primary driver of the market:

``The weakness of the dollar is a great driver here,'' said Francisco Blanch, head of commodities research at Merrill Lynch & Co. in London. ``Oil has become a little bit of a monetary phenomenon, where low rates boost demand for oil in emerging markets.''

That theme continued intolast Thursday:

Crude oil fell more than $2 a barrel after the dollar rose the most against the euro since December, reducing the appeal of commodities to investors.

The dollar strengthened after a report showed German business confidence dropped more than expected in April. Commodity prices also fell because U.S. stocks rallied. Nigeria's white-collar oil workers union halted a partial strike that began earlier today at Exxon Mobil Corp.'s operations in the country, Reuters reported, citing a union official.

``You are seeing a move away from commodities because of the rally of the dollar and in equities,'' said John Kilduff, vice president of risk management at MF Global Ltd. in New York.

``The news from Nigeria is also helping a little bit but this is mostly about the dollar and equities.''

Crude oil for June delivery fell $2.24, or 1.9 percent, to settle at $116.06 a barrel at 2:47 p.m. on the New York Mercantile Exchange. Prices are up 80 percent from a year ago.

Oil reached a record $119.90 a barrel on April 22 after the dollar touched an all-time low against the euro. The euro fell 1.3 percent to $1.5676 per dollar at 3:14 p.m. in New York, from $1.5889 yesterday.

``The weak dollar has been the key driver of the reality in commodities,'' said Tom Bentz, a broker at BNP Paribas in New York. ``Lately there has been a direct correlation between the dollar and crude-oil prices, which hasn't always been the case.''

The dropping dollar has been a key reason for the spike in commodity prices. Commodities are denominated in dollars. Therefore, a dropping dollar is by definition a price decrease as well. Traders have to bid up the commodity just to tread water.

An oil strike on Monday helped to send the market higher.

BP PLC on Sunday shut down the Forties Pipeline System that carries more than 700,000 barrels of oil a day to the U.K. because of a 48-hour walkout by employees at a refinery in central Scotland. Workers walked out of the Grangemouth refinery vowing not to give ground in their dispute with refinery owner Ineos over plans to close a generous pension scheme to new employees. Ineos Chief Executive Tom Crotty said it could take a week for the plant to return to production once the strike ends on Tuesday. BP said its pipeline could be up and running within 24 hours. BP's Kinneil plant, the onshore processing center for the pipeline system, is powered from the Grangemouth site.

"With the refinery being shut down, it will affect supplies from the North Sea and that has a potentially significant impact," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. "That comes at the same time that there's production disruptions from Nigeria. So the combined effect of those is the immediate factor that's put pressure on oil prices."

In Nigeria, the Movement for the Emancipation of the Niger Delta, or MEND, on Friday said its fighters hit an oil pipeline late Thursday, the fourth conduit the group has attacked in the past week. MEND said the pipeline belongs to a Royal Dutch Shell PLC joint venture. A Shell spokesman confirmed one of its pipelines had been hit, but provided no additional details.

Separately, workers at an ExxonMobil Corp. joint venture in Nigeria cut production by an unspecified amount to demand more pay.

The strike in the British Isles led to some of the highest prices of all time:

Crude-oil futures closed slightly higher Monday after hitting a new record near $120 a barrel, as a strike at Scottish refinery forced a pipeline closure, while rebel attacks in Nigeria and tension in Persian Gulf also fanned concerns about supply disruptions.

Crude oil for June delivery climbed more than $1 to a new high of $119.93 a barrel in overnight electronic trading, surpassing the previous high of $119.90 hit last week. It ended up 23 cents, or 0.2%, at $118.75 a barrel on the New York Mercantile Exchange.

The gains were driven by supply concerns after hundreds of oil workers at Ineos PLC's Grangemouth refinery started a two-day strike Sunday, forcing the closure of a BP -operated pipeline which transports 700,000 barrels of oil a day, or about 40% of the U.K.'s daily crude production.

The strike ended on Tuesday.

On Wednesday, Goldman Sachs said the window for oil dropping on Spring weakness was "closing fast"

Goldman Sachs Group Inc., the most profitable Wall Street bank, said the window for a decline in oil this spring is `closing fast,' as prices rise to records and the summer period of peak gasoline demand approaches.

U.S. crude imports are likely to rise because of lower inventories and the strength of local oil prices relative to the rest of the world, Goldman analysts led by Giovanni Serio said in their Energy Weekly report.

``Looking into the second half of this year, given the fundamental tightness, we believe the risks are substantially skewed to the upside,'' the report said.

The central issue here is there is a ton of money flowing into the oil market right now; it's the latest boom area of the market. And so long as that situation continues, we'll be experiencing high oil prices.

Goldman isn't the only grop that thinks oiloil will keep rallying for a long time:

Surging crude prices, which could surpass $200 a barrel in four years on tight supplies, could push gasoline prices to as high as $7 a gallon, CIBC World Markets analysts said Thursday.

Crude supplies are actually lower than some official estimates indicate, while demand is unlikely to fall anytime soon, according to a statement by analysts led by Jeff Rubin at CIBC, an investment bank. They forecast that these tighter supplies and continued strong demand will drive oil and gasoline prices to roughly double their current levels by 2012.

"It is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," said Rubin. "Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years."

Oil's increase in price is the most important of the last 30 years:

Demand in China continues to fuel demand, along with flare-ups in oil-exporting nations and a weaker dollar. But U.S. demand, after rising for years, is not a key contributor, Alliance Bernstein economist Joseph Carson says today in a note to clients. Domestic oil demand has dropped 1.6% over the last year as the economy weakens. He calls a price increase due to non-domestic factors “an exogenous shock, similar to to the supply shortages of the mid-1970s, early 1980s and briefly in the early 1990s.”

With the price shock of 2007-08, spending on energy as a share of wage income has shot up above 6%, topping the 1974-75 and 1990-91 shocks to be the worst since the 1980-81 runup. Comparing the additional cost of energy to income growth (especially sluggish in recent years), the current shock is far worse than any of the three prior ones, Mr. Carson says.


The figures “suggest that energy costs will crowd out other spending components because income growth is being stifled by weakness in payroll employment,” he writes. “Moreover, relatively thin saving flows offer consumers little cushion against the rising oil prices.”

Finally, yesterday's This Week in Petroleum report showed retail prices are still spiking.

For the fifth consecutive week, the U.S. average retail price for regular gasoline moved higher, reaching yet another all-time high price of 360.3 cents per gallon. The average price has spiked 21.4 cents since April 14. On a regional basis, while prices increased throughout the country, they did so at a somewhat slower pace than was the case during the previous week. The largest increase occurred on the East Coast where the average price jumped by 11.7 cents to 360.1 cents per gallon. This was the only region of the country to experience an increase greater than 10 cents. The price in the Midwest increased by 9.8 cents to 356.8 cents per gallon, up by 64.3 cents from a year earlier. The average price in the Gulf Coast was up by 9.4 cents to 350.5 cents per gallon. The average price in the Rocky Mountains, the lowest of any region, rose to 347.8 cents per gallon, up 6.2 cents from the previous week. Once again, the West Coast average price increased the least of any region, moving up by 5.2 cents to 378.6 cents per gallon. Nonetheless, despite the relatively small increase, the average price was the highest of any region. The average price in California increased by 4.6 cents to hit 389.2 cents per gallon.

Short version: The only bearish news of the week was a possible pause in the Fed's interest rate policy of lowering rates. That should help the dollar rise in value which should lead to a drop in oil prices. Hopefully. However, there are plenty of fundamental drivers to the demand side of the oil market right now, starting with China and India.

Oil Still Rallying

From the AP

Oil prices spiked to a record $117.40 a barrel after a Japanese oil tanker was hit by a rocket near Yemen and militants in Nigeria claimed two attacks on pipelines.

The 150,000-ton tanker Takayama was attacked about 270 miles off the east coast Yemen coast in the Gulf of Aden while it was heading for Saudi Arabia, its Japanese operator, Nippon Yusen K.K., said in a statement.

None of the ship's 23 crew members was injured. Hundreds of gallons of fuel leaked before a 1-inch hole in the tanker's stern was repaired, the company said.

Kyodo News agency reported that the Japanese tanker was fired on by a rocket launcher from a small boat.

Light, sweet crude for May delivery reached $117.40 a barrel but fell back to $116.88 by midday in Europe, up 19 cents from Friday's closing price.

On the daily chart, notice the following:

-- All the SMAs are moving higher

-- The shorter SMAs are above the longer SMAs

-- Prices are above all the SMAs

-- Prices have rallied and consolidated which is a very health bull market formation



On the weekly chart, notice we've had an incredibly strong rally. Prices have been rising for the last year. As they have risen they have consolidated their gains which allows some traders to take profits and others to get in. This is a bull market chart.

A Closer Look At the Oil Market

From Bloomberg:

Crude oil traded near $108 a barrel in New York after rising to a record yesterday as investors bought futures because the returns have outpaced those of financial markets.

Oil in New York surged 80 percent over the past year as the S&P 500 and Dow averages dropped. China, the second-biggest oil- consuming country, increased crude-oil imports by 18 percent last month and halted overseas shipments to meet rising demand.

``Momentum coupled with sufficient fundamental underpinnings, such as the Chinese oil-import data for February, keeps propelling us,'' said John Kilduff, senior vice president of energy at MF Global Ltd. in New York. ``The grab for hard assets is on due to the lack of confidence in the rest of the markets at the moment.''

The Big Picture made a very astute observation::

The Fed has complicated the current situation: In both September and January, the FOMC aggressively cut rates, in both instances, much more than expected. A measured response from the Fed would have been appropriate; however, their panicky monetary policy will ultimately backfire. This was a credit problem - not an interest rate problem.

The bigger issue is the Fed signaled to speculators in the commodities and currency markets that the they were throwning in the towel on inflation, and were prepared to print money until we run out of ink. Its no coincidence that Commodities then exploded upwards - the biggest monthly moves since the 1970's - along with the dollar tanking, and gold rallying 40% since August 2007.

Let's take a look at the charts:



Note the following:

-- The market has been rallying for the better part of a year.

-- In September 2007 the market broke through upside resistance established in July 2006.

-- At the end of last year and beginning of this year prices consolidated gains above previous highs.

-- Prices broke through resistance again within the last month

This is a very bullish chart.

The real question will be what happens when the market corrects. If it corrects above the upper boundary of the late 2006 - early 2007 consolidation range, then expect further moves higher.



On the daily chart, notice the following

-- We get a good picture of prices moving through upside resistance.

-- The market has been in an upward sloping trend line since the beginning of November

-- Prices are above the SMAs

-- The shorter SMAs are above the longer SMAs

-- All the SMAs are moving higher.

This is also a very bullish chart.

The US Says It's Supply; OPEC Says Its the Dollar

From the WSJ:

Ministers from the Organization of Petroleum Exporting Countries, meeting in Vienna, blamed surging oil prices on the weak U.S. dollar and "mismanagement" of the U.S. economy. President Bush shot back, telling a renewable-energy conference in Washington that "it should be obvious to all that the demand [for oil] is outstripping supply." The U.S., he said, must change its habits. "We've got to get off oil," he said.

Mr. Bush urged OPEC this week to pump more oil. The cartel supplies just less than 40% of world demand.

OPEC ministers said they see a well-supplied market. OPEC President Chakib Khelil said the oil market is "moving into a new phase" of slower economic growth and ebbing demand.

The oil market is interesting right now. I don't think there s one factor that is pushing prices up, but instead a strong vortex of three events

-- Chine and India and their over 2 billion people have an increased standard of living. That means they want more energy (and food).

-- The dollar is dropping and has been for some time. That means the currency that oil is priced in is dropping which is a de facto increase in the price of oil.

-- There is a flight to the commodities area as an inflation hedge against the dropping dollar. It is also the only market that is rallying right now, so we're getting a number of speculators in the market.

Let's see what the charts say about the oil/dollar price relationship.





Notice the following:

-- The dollar's chart is "down/bear market rally or consolidation/down

-- Oil's chart is up/consolidation/up.

Those charts look pretty "mirror imagey" to me. It's not an exact match, but it's pretty clear that oil and the dollar are clearly linked.

The Fed, the Dollar, the Euro and Oil ... Oh My!

As the chart above clearly shows, the dollar has been dropping for the better part of the last two years. There are a lot of reasons for this. The mammoth US trade deficit (which is getting a bit better) and the large amount of US debt held by foreigners are prime reasons. However, since the Fed started cutting rates aggressively, the dollar has continued to drop.



As the chart above shows, the dollar fell to a new low yesterday, after forming a bear market pennant from mid-December until recently. The reason? The promise of more interest rate cuts from the Fed:

The dollar traded at a record low below $1.51 per euro after Federal Reserve Chairman Ben S. Bernanke signaled he's ready to lower interest rates again to support the weakening U.S. economy.

An index that tracks the currency against six major counterparts dropped yesterday to the lowest since its inception in 1973, as European Central Bank policy maker Axel Weber said investors expecting rate cuts in the region are underestimating inflation. The U.S. currency fell to an all-time low against the Swiss franc and to a 23-year low versus the Australian dollar.

``This is a new chapter for the dollar,'' said Russell LaScala, head of foreign-exchange trading in North America at Deutsche Bank AG in New York. ``You are seeing divergence of central banks' views.''

.....

LaScala said dollar-selling gained momentum on Feb. 26 after Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation. The currency has slid 4 percent against the euro in the past three weeks as the housing recession worsened and consumer confidence sank, leading traders to exit bets on a dollar rebound. The dollar will rise to $1.45 per euro by mid-year, according to the median forecast in a Bloomberg survey.

As the dollar has dropped, the euro has benefited. Notice how the euro and the dollar chart for the last two years are near mirror images of one another.



And notice how the euro dollar mirror image relationship plays out in the daily chart above.

Now let's add one more piece to the puzzle -- oil.

Crude-oil futures fell more than $1 to end below $100 a barrel on Wednesday, after hitting a record high above $102 overnight, as government data showed a bigger-than-expected buildup in U.S. crude inventories.

Crude oil for April delivery dropped $1.24, or 1.2%, to settle at $99.64 a barrel on the New York Mercantile Exchange. It surged to an all-time high of $102.08 in electronic trading over night, driven up by the weaker dollar.

Here is a long-term chart of oil:



Notice the clear long-term rally in place for the last year.



On the daily chart, notice the trading/consolidation range for the last few months and the recent break-out. However, also notice the break-out isn't that strong.

So -- let's look at the following chain of events.

1.) The Fed is lowering interest rates and has signaled they will continue to lower rates.

2.) This entices forex traders to sell the dollar.

3.) A dropping dollar encourages oil traders to buy oil as an inflation hedge from the dropping dollar.

4.) A dropping dollar is also a de facto decrease in the value of oil -- which it so happens is priced in dollars. This puts a price floor under oil's price.

5.) As oil prices increase, inflation increases.

6.) As the dollar drops, forex traders look to a stable currency which is the euro (at least for now).

So as the Fed lowers interest rates, they are in fact stoking energy inflation and encouraging the migration away from the dollar.