Dec 9, 2013
By Brett Philbin
In the oil market, the “death cross” hasn’t signaled a long period of gloom and doom.
Oil futures are up roughly 5% on the New York Mercantile Exchange since the ominous trading pattern known to traders as the death cross emerged. The technical indicator, which occurs when a contract’s average price over the previous 50 trading sessions falls below the 200-day average, is often seen as a sign that a short-term decline is turning into a longer-term slump.
Nymex futures fell into that trap on Nov. 29, when the 50-day moving average dropped to $98.27 a barrel, just below the 200-day average. Oil prices have since bounced back on expectations of increasing demand as refiners return from maintenance season and the projected opening of a key Gulf Coast pipeline. Oil futures settled down 0.3%, or 31 cents at $97.34 a barrel.
But with the death cross still active, the oil market isn’t out of the woods yet, traders say. Despite some recent gains, market participants are still worried about a glut of U.S. supplies and the pending wind down of the Federal Reserve’s $85-billion-a-month bond buying program.
“Last week was a classic oversold bounce, the death signal still remains active,” said Adam Sarhan, chief executive of Sarhan Capital, a financial advisory firm.
Data from the Energy Information Administration showed that U.S. crude stockpiles stood at their highest end of November level since 1930, amid booming domestic output. A reduction of Fed stimulus, expected as early as this month, could push up the price of the dollar, making oil more expensive to buy with other currencies.
The last two death crosses in the oil market occurred in June 2012 and August 2011. Two weeks after the most recent cross happened, oil prices fell $7 a barrel in two weeks, before gaining $13 a barrel roughly eight months later. in the previous instance, futures fell nearly $10 in two months, before they rose near $100 barrel by late-December 2011.
Not everyone is buying that argument. Data from the Commodity Futures Trading Commission shows that money managers boosted their bets on rising crude prices to the highest level in six weeks on Dec. 3.
The bullish trend was recorded after the news that TransCanada Corp.’s expects to open the southern leg of its Keystone Gulf Coast pipeline in January. The move could potentially ease the bottleneck of crude oil in Cushing, Okla., the delivery point for the Nymex futures contract, and transport more fuel to refineries in Texas.
Meanwhile, stronger-than-expected economic data last week also showed signs of an improving U.S. economy and could suggest a pickup in oil demand.
United-ICAP senior technical analyst Brian LaRose said, “I think nothing of the death cross pattern….if it does play out it’s more coincidental more than anything,” adding that “it’s now the time of year when I look for gasoline to lead a pre-season rally ahead of the summer driving season.”