What’s Going on with Oil

All the concerns regarding tropical storm Gustav becoming a level- our hurricane and smashing into the key Gulf of Mexico oil supply and refining areas quickly faded over the weekend, as the storm fizzled, and is now expected to fade away as more of a threat than a reality.

 With the storm threat removed, oil can now trade on global fundamentals, which are currently bearish. The reality of an economic slowdown occurring not only in the U.S. but also overseas in Asia, including oil-hungry China and increasingly India, has lessened the demand for oil.

 In Asian trading on Tuesday, the light, sweet crude for October delivery fell below its previous sideways channel at $110.00 to $106.00 a barrel, a whopping $10.00 below its close on Friday and below the 200-day moving average at $109.61.

 It is clear that global economies are showing some slowing and this will pressure oil prices. The recent strengthening of the U.S. dollar also pressured oil prices, because buyers have to pay for oil as denominated in U.S. dollars.

 There is now speculation that the Organization of Petroleum Exporting Countries (OPEC) wants to keep oil above $100.00 a barrel and could cut production when it meets again at the upcoming OPEC meeting next week on September 9. We expect OPEC may wait a bit to see if oil prices rally before taking the step to cut production, which is a more drastic measure.

 As we move along over the next few weeks, oil will be in the spotlight again, as there will be numerous storms brewing in the Gulf region that will cause some upside buying to oil.

 Technically, the October contract is near-term bearish with weak Relative Strength. Given the selling, there could be some buying support, as oil is technically oversold. Failure to hold could see a run at $100.00. A bounce could see a move back to the 200-day moving average.