The economic recession remains the main factor weighing on crude oil prices as supplies rose to the highest level since May 2007 on weak demand while the expired January contract settled at its lowest level since February 2004 at 3387. The market pushed aside OPEC’s 2.46m production cut bringing the total cut since September to 4.2m barrels per day, but that will come into play in 2009 as demand may pick up in the heart of the winter season. If demand does not pick up in early 2009, we can expect another cut at OPEC’s January 19th meeting in Kuwait. The active February contract settled higher on Friday at 42.36 widening the spot Jan/Feb spread to its largest premium since 1986. This contango market structure has producers taking delivery of spot crude to increase stockpiles at cheap prices.
Technically, as the Feb. contract takes the spot position, there will be a significantly higher rollover gap this week while setting key Support at the 4200-4000 range. Since the long term trend remains down, we may see continued testing of the 4200-4000 Support range, but with last week’s Feb. contract’s 2008 low at 4090, any rebounding from there will be viewed as a potential double bottom reversal signal. Additionally, holding 4000 confirms the rollover gap as a technical breakout setting the stage for higher prices over the course of the week. Failures to hold price action this week above 4000 will have a negative impact on oil with a target range below at last week’s spot lows from 3500-3250.
With initial key Resistance at the 11 week downtrend line crossing at 4600-4620, breakout trade above there triggers the 1st leg up into the 4800-5000 range where rallies failed last week. Another failure at 5000 will be bearish on oil prices to close out the year. The major breakout is above 5000 igniting a 2nd leg up with price objectives above at 5400-5600 on initial runs and 6000 on extensions.
