Tomorrow December 8, the European Central Bank meets and will announce its quantitative easing program. This is sure to be a major market mover, and we caution clients not to enter new positions prior to the meeting and if positions are held in either the dollar index or euro (which we do not recommend), have exit parameters in place.
WTI crude oil:
January WTI crude oil lost 86 cents on volume of 1,257,172 contracts. Total open interest declined by 4,199 contracts, which relative to volume is substantially below average. The January contract accounted for a loss of 36,994, which means there were substantial increases of open interest in the forward months, but not enough to offset the decline in the January contract.
As this report is being compiled on December 7 the January contract is trading 77 cents lower and has made a daily low of 49.81, which is the lowest print since 48.98 made on December 1. The EIA report revealed that crude inventories declined by 2.4 million barrels, which is normally bullish, but this is not having a positive impact on crude in today’s trading.
We think crude oil should continue its corrective move and we are looking at the 20 day moving average of 47.59 as an area where bullish positions can be considered. The 50 day moving average stands at 48.79, but this is due in part to the contango structure of the market. The 20 day moving average accurately reflects market action over the past month. On December 1, OIA announced that January WTI generated short and intermediate buy signals.
The Energy Information Administration announced that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.4 million barrels from the previous week. At 485.8 million barrels, U.S. crude oil inventories are at upper limit of the average range for this time of year. Total motor gasoline inventories increased by 3.4 million barrels last week, and are well above the upper limit of the average range. Both Finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories increased by 2.5 million barrels last week and are above the upper limit of the average range for this time of year. Propane/propylene inventories fell 1.5 million barrels last week but are near the upper limit of the average range. Total commercial petroleum inventories increased by 1.4 million barrels last week.
January natural gas lost 1.9 cents on heavy volume of 583,076 contracts. Volume increased substantially from December 5 when the January contract gained 21.8 cents on volume of 495,938 contracts and total open interest increased by a substantial 18,178 contracts. On December 6, total open interest increased substantially, up 16,013 contracts, which relative to volume is average. The January contract lost 15,362 of open interest, which means there were more than enough open interest increases in the forward months to offset the decline in January and increase total open interest at an average rate.
As this report is being compiled on December 7, the January contract is trading 6.00 cents above yesterday’s close and has made a new 52 week high of $3.748, which is fractionally above yesterday’s 52-week high of 3.732. Natural gas is a weather market and weather will determine the course of the market. On November 25, OIA announced that January natural gas generated a short term buy signal and had been on an intermediate buy signal prior to the 25th. The market is massively overbought and well overdue for a correction. Do not enter new bullish positions at current levels, and do NOT short natural gas.
The March dollar index advanced 41.8 points on volume of 35,967 contracts. Volume declined dramatically from December 5 when the March contract lost 74.9 points on volume of 102,884 contracts and total open interest declined by 486. On December 6, total open interest declined by a very strong 1,730 contracts, which relative to volume is approximately 75% above average meaning that liquidation was extremely heavy as the dollar index contract advanced strongly. The December contract lost 1,699 of open interest, which is to be expected because this contract faces expiration shortly. However, the March contract lost 34 of open interest, which is very negative.
As we pointed out at the top of this report, the European Central Bank will be meeting tomorrow and this will be a major event for the dollar index. The March contract is getting close to generating a short term sell signal and this will occur when and if the March contract makes a daily high below OIA’s key pivot point for December 7 of 99.995. The rally in the March contract will resume if it makes a daily low above OIA’s key pivot point for December 7 of 100.881.
In our view, clients should liquidate all positions immediately and move to the sidelines. Trying to guess what a central-bank will do is a fool’s errand because the speculator has to be right in two ways: First, they have to be right about the decision, and second have to be right about the market’s reaction to the decision.