NEW YORK -- After a dramatic 6-month decline in fuel prices and with the price at the pump peaking for the year this Memorial Day Weekend, CSP Daily News asked oil analyst Walter Zimmermann for his take on where things will go from here. Here is his exclusive analysis.
Petro-complex Update
As I write this, Brent crude oil is finally breaking below its key $64 support level. An average spring-to-summer decline will target the $54 area. An average spring-to-summer decline in WTI targets the $49 area. In ULSD (ultra-low-sulfur diesel), a break below $1.7400 per gallon will open the door for a dump that may fall as low as the $1.3000 area by year end. However it is in RBOB where the bulk of the speculative length had been residing. I say “had been” because those speculating bulls seem to be in full flight. The seasonal peak in RBOB now clearly appears to be past tense at the $2.0969 Memorial Day high. And what a sneaky peak it was.
RBOB: Sneaky Peak
That $2.0969 Memorial Day pop up created a double top “bull trap” against the $2.0950 high of May 6 that was even more sneaky than last year’s bull trap. In 2014 spot, RBOB put in a peak at $3.1128 on April 24, 2014. Prices then quickly fell to a $2.8718 low. Then after a painfully slow crawl higher that made many glaciers look like speed demons, RBOB was able to eke out one marginally higher high at $3.1520 on June 23, 2014. Then RBOB just sat there for a few days, as if saying, “What the heck am I doing up here?” Then the bottom fell out. That was a bull trap for the textbooks. So is this year’s precise double-top.
The U.S. Dollar
On May 15, I got a major “add to long-term length” buy signal in the DX Index and a major sell signal in the Euro-fx. I recommended getting long the greenback and short the Euro-zone currency first thing Monday morning May 18.
In the DX Index, the only hope for further congestion before a break out to new multi-decade highs is a retreat from the 98.840 level. Otherwise it is up and away to the 101.00 to 103.00 range minimum. A break below 1.0675 in the Euro-fx targets 0.9830 minimum. The issue here is the direct and inescapable inverse relationship between the Euro-fx and the U.S. dollar, and the direct and inescapable inverse relationship between U.S. dollar trends and trends in crude oil and petroleum products. Euro-fx down = U.S. dollar up, and U.S. dollar up = petroleum down. Period. End of discussion.
So if (actually when) the greenback breaks above 98.840, the RBOB bulls will suddenly find themselves fighting a turbo-powered bear market in petroleum, the turbo boost of course having been supplied by the resurgent U.S. dollar.
RBOB Seasonality
For the years 1983 through 2014, the average date of the spring RBOB peak is April 30. Last year double-topped on April 24 and June 23. This year’s double-top certainly looks to be in place at May 6 and 25.
The average summer decline in RBOB prices has been a 26% loss in spot contract value while the average spring-to-winter decline in RBOB has been a 33% loss in spot-contract value. So for a purely seasonal event without any help whatsoever from a rising U.S. dollar, and from the $2.0969 high, we are talking a downside risk somewhere between $1.5517 and $1.4049. For fans of synchronicity, the 0.618 retracement of the entire $1.2265 to $2.0969 advance is $1.5590, and the 0.7862 retracement is at the $1.4128 level.
To Confirm a Peak?
Bears only have one task before them: break below the 0.236 retracement of the entire advance at the $1.8915 level. That would provide a compelling additional chunk of evidence that $2.0969 was the seasonal peak.
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