Commodities | Feb 23 2010
By Chris Shaw
Oil prices have strengthened in the past two weeks to the extent the losses recorded early in February have been erased. The gains have been enough to bring speculative bulls back into the market as evidenced by their purchases of more than 11,000 contracts in the week ending February 16.
In the view of ANZ Banking Group head of commodity research Mark Pervan, the oil price should continue to gain this week on the back of a combination of positive macroeconomic sentiments and some momentum trading, as cumulative net long positions now represent 9.9% of total open interest.
Higher oil prices short-term is a view shared by the technical analysts at Barclays Capital, who note with oil closing above the February 3 pivot high of US$78.54 last Friday, the market now looks poised for renewed strength, with the October 2009 and January 2010 highs of US$84.09 and US$84.96 the new targets.
A move higher is supported by an improving term structure, the Barclays technical analysts pointing out the March/April spread has reached levels last seen in October 2008, while the April/May spread is close to hitting highs last achieved in April last year.
The technical analysts suggest any pullbacks from here should be viewed as counter-trend corrective moves, with support now in place at a range of US$77.07/$78.15 per barrel, while it would require a break below US$76.71 for the bears to gain control of the oil market. Daily momentum indicators are overbought, which they note implies any advance will be a choppy one.
While the outlook is for higher prices in the short-term, Pervan suggests such a move will only make oil even more overvalued than it was before as market fundamentals don't really support the latest price gains.
As evidence, he notes last week an Energy Information Administration (EIA) report showed a larger than expected 3.1 million barrel build in commercial crude stocks in the US for the week ending February 12.
Despite the lack of supportive fundamentals, Pervan is forecasting prices for West Texas Intermediate on the NYMEX Exchange of US$85 per barrel at the end of March, US$90 per barrel at the end of June and September and US$95 per barrel at the end of December 2010.