Crude Oil Is Headed Lower

 | Oct 11, 2013 | 3:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

cl

,

uso

Crude oil prices have been hovering above $100 per barrel since July. The initial move into triple digits was sparked by an Egyptian coup, but it was tension in Syria that kept prices afloat for the longer term. Following the political events of this summer, we were expecting what we view as "fluff" to come out of pricing.

Although it has taken much longer to materialize that we anticipated, the market isn't disappointing us. Crude oil has fallen from the $110-per-barrel area, to a low of about $100 and appears to have room to continue moving lower. We are targeting the $96 area initially, but prices could easily reach the low $90s.

Source: QST

There are a few compelling arguments that support the bearish view. For instance, crude oil prices seasonally experience weakness from mid-October through mid-December. Analysts explain the tendency as a tapering of fuel consumption following the summer driving season as well as through the winter weather months.

Another bearish argument is the fact that most speculators are already net long the market. In fact, the "large trader" group of the CFTC's COT Report -- considered to be the smart money -- is holding near-record net-bullish positions. At some point, the long speculators will opt to liquidate and that can only mean one thing; lower crude oil prices.

Another thing to consider is the massive backwardation priced into the crude oil futures markets. In a normal market, described as contango, the price of near month futures contracts will be higher than that of distant expiration months. This is because there is a "cost to carry" crude oil prior to delivery; in other words, crude set for delivery in the future should be valued at a higher price because the holder of the crude must pay for storage and insurance between now and the future delivery date.

In today's market, futures contracts with closer expiration months are trading at a higher price than that of contracts with more distant expiration dates. This is an abnormal environment and likely won't persist for long.

The inversion can be explained by expectations of supply disruptions at the hands of the Middle East and strong short-term demand, but it will likely take a fresh event to avoid prices going back into a more normal relationship. Thus, a probable scenario would be for the price of crude oil in the near contracts to decline to a more fundamentally stable price.

Columnist Conversations

Is this the biotech revolution or the biotech bust? View Small Cap Biotechs Like Never Before: Transparency is...
Market gets hit from impact of sanctions against Russia for second day in row but manages to rally a bit to en...
We took out some of the high end of support, but I'm still looking at this symmetrical pullback for entries on...
going into trading today roughly 37 million shares of X (US Steel) was held short.today big X has traded 27 mi...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.