Bullish Signs Emerge for Oil Prices

Oil markets continued to grind higher, as investors continued to move capital into riskier assets.  On the heels of last week’s better than expected employment report, US growth prospects are beginning to climb, adding a bullish tone to the petroleum markets.

Oil graph

Oil prices are starting to show specific signs of bullish price action.  Specifically, the large contango that was seen in WTI oil prices during the first half of 2011 have nearly disappeared.  The term structure of oil is based on the futures market in which there is delivery of oil contracts for every month for the next 5 years, and then yearly prices for 10 years.  The term structure is categorize as either backwardation, when prompt oil prices are higher than future prices, or contango, where future prices are higher than prompt prices.

When the market is in contango, to the extent that traders witnessed during the first half of 2011, supply is greater than demand, making prompt oil less attractive.  The difference also makes it attractive for a traders to hold and store oil, as the market is paying enough to keep the market in full carry.  Backwardation, is when demand increases pushing prompt prices higher than future prices, as demand for current oil is high.  The move from contango to backwardation is positive for oil prices.

On the bearish side of the ledger, OPEC signaled in its monthly report that demand for the year could be reduced by 180,000 barrels.  The group sighted the declining demand from slower growth in US, Europe and China.  During the first half of 2011, many analysts believe that expected supply would not keep pace with increasing demand.  Now OPEC believe that the opposite might occur.

WTI oil prices broke out above a short term trend line and is now poised to test resistance levels near the highs seen in September near 90.50.  Crude oil has moved up nearly 11 dollar a barrel over the course of the past week, and the potential for profit taking could be in the cards ahead of Thursday release of oil inventories by the Department of Energy.  Support is seen at the lower end of the current range near $75.