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-Crude Oil Continues The Recent Decline, Back To Support At $74 Under Weak Fundamentals Of Heavy Supplies, Poor Consumer Demand, Bleak Economic Outlook, And Precarious Stock Market, While Natural Gas Advances After Technical Correction And Storm Concerns Despite Larger Injection

Technical Outlook

Since my report last week I said looking ahead technical indicators were obviously still exhibiting grossly oversold warnings and stated under the current posture, if I didn't see a new low achieved within the next 3-5 sessions below $3.70, then I anticipated prices to rebound back higher to surpass initial resistance at $3.92 and then the $4.0 benchmark and eventually takeout $4.26. Since then that exact scenario has transpired with prices taking out all of my initial resistance levels with the market challenging $4.10 today before settling at $4.06 and the highest close in almost a month. My intermediate and longer-term upside objective at $4.26 is still in the process of being reached in my opinion. Technically the market has rebound from grossly oversold levels and may have established a longer-term bottom near $3.60 that could remain in place for the balance of the year. While technical indicators are no longer grossly oversold, the current cycle rebound suggests values have more distance on the upside to cover before becoming short-term overbought. The linear oscillator and the MACD both display a wider positive divergence exists leaving more room on the upside for the market to run. Momentum and relative strength also suggest additional upside movement is in progress. Look for initial support to come in at $4.0 and then more critically at $3.92 which should hold up if tested with the market now targeting overhead resistance at $4.12 and then $4.20 before the more important challenge at the critical pivot price level at $4.26 from which the longer-term chart suffered a vital breakdown from a repeating support base that ran all the way back to March.

Fundamental Supply Update

This week's EIA report revealed an injection of 103bcfs which was noticeably higher than previous estimates which were closer to 92bcfs by Dow Jones and Bloomberg respectively. Yet it was also higher than last year's 67 and well above the 5 year average number of 77 bcfs for the same week. Storage now stands at 3267 which is 182 bcfs less than last year and 192 above the five-year average of 3075 or 6.2%. Following the report prices still slumped further into negative territory testing the lows of the day at $3.85 before firming the rest of the session eventually testing 4.10 per million BTU before closing the open outcry session at $4.06 basis October Delivery after adding 7 cents. The industrial economic demand outlook remains weak, and the cooling demand of summer is about over with peak Storm season in the Tropics standing out as the lone threat to supplies, with hurricane Karl on track to make landfall in Mexico over the weekend while hurricanes by Igor and Julia expected to dissipate over the Atlantic soon. While none of these storms disrupted the energy output they remain however as a strong reminder to traders that during this time of year production could be halted at any time. This tentative state of affairs proved to be too risky for the short side of the market to maintain their position near $3.60 per million BTU this close to peak storm season along with winter following closely behind and after the surplus had been reduced to a single digit differential. So fundamentally I look for prices to remain likely above $3.80 and reaching higher up into the resistance area between $4.20 and $4.26 over the near term.

Concerning crude oil, the market gave up earlier gains and fell today for the third consecutive session giving up $1.45 or 1.9% to settle at $74.57 per barrel on the New York Mercantile Exchange pressured by expectations that the major pipeline from Canada to the Midwest was said to reopen at full production amidst a backdrop of weakening U.S. economic data. The resumption of the Enbridge pipeline that had temporarily shut in 670,000 barrels a day from an earlier discovered leak back to normal status earlier than originally anticipated prove to be just another negative against the recent decline in oil that had been promulgated earlier on the supply disruption in extreme optimism over the U.S. possibly avoiding a rather ominous double-dip recession scenario. The minuscule drop in U.S. jobless claims by 3000 to 450,000 for the latest week hardly provided enough fuel to continue the charade of optimism for economic recovery that was propelling petroleum prices higher. On the reality cited the equation oil prices began to buckle after the Philadelphia Federal Reserve index of economic activity showed a -0.7 after a -7.7 reading the previous month. This negative revelation of business activity in conjunction with more of the same for the New York area prove to be a much stronger indicator of a sluggish economy literally on the verge of slipping back into the grips of the same strong and relentless recession that engulfed our economy in 2008, than any brief positive fluctuation in jobless claims or the slight increase in retail sales for August of .4% that can easily slip into negative territory over the next few months. With gasoline demand from consumers continuing to subside the hand writing is literally on the wall for lower petroleum prices ahead. Unless a tropical storm makes a direct hit into the production facilities of the Gulf of Mexico this late in the season crude oil will find it difficult to for a much higher than the recent peak this week at $78 per barrel with prices more likely to subside back towards the psychological support level of the $70 benchmark, and I anticipate over the near term for prices to remain a range found between this same lower end parameter and $80 for the upside psychological limit over the intermediate term unless a wild card emerges.

September 16, 2010
Guy Gleichmann, President
WaveLength Energy CTA
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