Oil showed signs of stabilizing after trading under pressure for the past two weeks, and this is coming largely as a result of the latest weather forecasts which suggest that Hurricane Sandy will present obstacles for refinery production along the East Coast of the US. This reduction in supply (a bullish scenario) is being taken alongside the improved sentiment with respect to the global manufacturing outlook, which is another factor that could continue to be supportive for oil prices into the end of the year.
Hurricane Sandy has made headlines in the last week, as the potential “Frankenstorm,” with some saying that this could be the worst storm to hit the North American continent in the last 100 years and as long as this story circulates through the markets, it will remain a positive for oil values.
Assessing the Data
But since storm stories can only influence the market for so long, investors will be forced to turn back to the actual economic data at some stage and base trades off of these figures. So, the first piece of information to watch could be seen with the US GDP figures, which rose by 2% for the 3rd quarter. This was higher than market expectations and suggests that the worst of the recessionary period is now in the past. This has helped to propel the rise in oil and gas prices and when taken in combination with the prospects of supply disruptions gives an overtly bullish scenario going forward and there is little on the horizon that is likely to divert this bias in the near term.
Looking from the broader perspective, oil prices have dropped 13% so far this year and were lower by nearly 5% this week alone before the later stories helped to stabilize prices. In the near term, traders should watch for any stories that relate to the five oil refineries that can be found in New Jersey, Delaware, and Pennsylvania for signs of what will come next for oil values. These refineries produce 600,000 barrels of gasoline per day and if these shut down we could easily see some short term spikes from this year’s lower levels.
In other data, consumer purchasing power came in lower than expected, with disposable income (inflation adjusted) improving by only 0.8% on an annual basis. This is the smallest gain since the second half of 2011 and figures like this pose a moderately bearish influence on oil prices as we head into the holiday season.
Oil is currently trading at some very interesting technical levels on the daily charts, with prices now seen falling to the 61.8% Fibonacci retracement of the rally from 77.30. Given that the lows from this rally are likely to hold into the end of the year (weekly double bottom supports here), there is relatively little in the way of long term downside that will likely be seen. Preferred strategy is to enter into long positions at the current levels, looking for a rise back into at least the mid-90s before stalling. Daily close below 77.30 will lead to some sideways trading.