Crude Slides Below Key Technical Level

NEW YORK (TheStreet) -- Crude oil prices broke below the key technical level of $111 on Wednesday after the latest data on inventories came in much higher than expected.

Light sweet crude for June delivery was down between 1.5% and 2% for the majority of the volatile session, and was recently trading near the $109 per barrel mark. The Wednesday afternoon crude settle price was $109.24, a decline of $1.81 from the previous settle price of $111.05.

Brent crude was recently trading down 1% to $120.62.

Some rationales for the recent pullback in oil seemed thinner than others to traders in terms of having anything more than a one-day impact on potential upside in oil prices.

Crude inventory/Gasoline Draw

One oil market specific issue getting a lot of play on Wednesday was the latest crude inventory report from the government, showing a rise in inventory of 3.4 million barrels, above the Wall Street economists expectation.

At the same time, the gasoline draw down decreased from 2.5 million barrels last week to 1 million barrels. Some commentators were out waving the "demand destruction" flag, yet a closer look at the inventory data suggests that it could just be more noise.

For one, the crude inventory build up last week was 6 million barrels, twice this week's level, yet the market did not lean on it as a reason to sell oil. The gasoline drawdown was twice as large last week, at 2.5 million barrels.

However, the halving of the inventory build this week as compared to last week, and the halving of the gasoline drawdown this week versus last week, presents more or less the same basic equation. Beyond that, crude inventory has been at a historically high level for months.

MasterCard SpendingPulse said the four-week average of gasoline purchases in the U.S. dropped compared to a year ago, but it was the sixth consecutive week that MasterCard noted this trend. The government report said the four-week average of wholesale gasoline demand also dropped by 1.9%, but again, this was the sixth straight week that this trend has been reflected in the data -- in the last government crude report the decline was 1.6%.

The physical state of the crude inventory has not been the driver in the oil trade. Phillip Silverman, of Kingsview Capital said on Wednesday, "Once again, I'm not too focused on the inventory. Traders aren't focused on the amount of crude. It's not an issue. There's plenty of crude out there."

Matt Smith, commodities analyst at Summit Energy added, "There's not too much to be read into the decrease in the gasoline drawdown level yet. This week the market latches onto the higher crude build whereas in previous weeks it latched onto the bigger drawdown in gasoline."

Shortly after reaching a 31-year high, silver plummeted by 7% on Tuesday and another &% on Wednesday, touched below the $40 mark, and declining by a total of 19% over the first three days of the week -- the largest 3-day drop for the precious metal since 1983, according to CNBC data. By Wednesday morning, the lead story in the Wall Street Journal was the reported selling of precious metals by the hedge fund masters like Soros Fund Management, which has been a prominent hoarder of precious metals.

Phil Flynn, market strategist at PFG Best, wrote on Wednesday, "Silver bugs bugged out as margins increased on silver and the market's recent failure at what seemed to be everyone's market objective of $50 an ounce. Oil tried to hold up while silver was crashing yet the wave of selling impacted oil as traders looked to preserve profits on part of their portfolio or they simply had to cover to meet a margin call."

Kingview Capital's Silverman agreed, saying "People are taking off risk and its being led by commodities. Silver is shaking up the market a lot."

The Technical Argument

From a technical perspective, the oil price had been above $114 just a day ago, after having trouble reaching that level. Now even below the $111 level, which seemed to provide short-term support, the bearish action implies that the oil price could still trend down in the near term to the next psychological threshold below $111, in the range of $104 to $105, traders said.

Kingsview Capital's Silverman said that, from a technical perspective, the 5% decline in oil prices by Wednesday makes it difficult to parse the next volatile swing, prompting traders to question, is there potential support at this level, or is oil heading down to the $106?

"As prices come down volatility moves back into the market, and we are looking to make trades into the selloff, especially if oil comes down another $3 or $4," the manager said. "With this level of volatility, patience is the key," Silverman said.

"Oil struggled to get through the $111 level a week or so ago and once it was above seemed to be holding, but now a combination of factors has pushed it back through. The bigger picture is the weaker dollar will come back to support crude when general risk appetite is better," said Matt Smith, commodities analyst at Summit Energy.

Smith believes that while there are plenty of reasons for the selloff, he still believes that it's the market consolidating, investors taking profits before oil prices moves higher again.Kingsview Capital's Silverman said that the perverse impact of the Osama Bin Laden news this week is that the Middle East risk premium had disappeared as a trigger for bullishness on oil prices, even though nothing has changed in the Middle East. "I think the reality is that the Middle East is like a snowball rolling down hill. Osama reframed the news temporarily, but I don't expect that situation to be resolved any time soon."

"The Middle East is off the table at the moment, with the focus on the picture of Bin Laden rather than photos of the protesters, but it could come back," said Summit Energy's Smith.

Phil Flynn, PFG Best market strategist isn't calling a top, but a correction.

"The sudden reversal of fortunes raises significant questions," Flynn said. "Is the bull market for precious metals are over? Or is this a great buying opportunity? Well the answer to the first question is no. The answer to the second question is yes but with reservations."

Kingsview Capital's Silverman said if he has a big concern for the upside potential in oil, it's one that no one is thinking about: A dollar bounce.

"You have to be careful when everyone is on one side of the boat that it doesn't tip over," Silverman said. "If you see the dollar bounce, all assets come down. It's the biggest thing supporting them. Everyone is so bearish on the dollar yet things don't move in a straight line."

Energy stocks continued to sell off for the third day this week, and the pace of selling increased, with the sector down more than 2%, while the major indexes declined by less than 1%.

Chevron(CVX) announced on Wednesday the acquisition of assets in the Marcellus Shale, but it led the U.S. majors down alongside ConocoPhillips(COP), with a loss of close to 2%.ExxonMobil(XOM), was down by 1.4%.

The soaring profits reported last week by Big Oil have not helped the stocks. In fact, ConocoPhillips, which showed operating weakness amid the rising oil prices and better refinery margins, is down 6% since it reported last week. ExxonMobil, which had the best earnings of the U.S. oil majors has declined by half that level or 3% since its earnings.

Tuesday was a terrible day for the major U.S. independent energy companies, with earnings reports from Chesapeake Energy(CHK), Anadarko Petroleum(APC), and Marathon Oil(MRO), being overshadowed by the big commodities selloff and energy sector decline.

These three stocks beat expectations for the past quarter, but the stocks continued to decline on Wednesday with Anadarko and Chesapeake leading the decline among major U.S. independents, down 3% -- Chesapeake is down close to 10% in the past two days, and the reaction to its earnings was specific to company strategy and financial discipline. Marathon Oil has declined 5% since its report on Tuesday.

The energy stock earnings continued to beovershadowed by the heavy selling , with Devon Energy(DVN) down 3% after its Wednesday earnings report, even as it showed production gains and financial results that were in line.

SandRidge Energy(SD) declined by close to 7% on the day before it is scheduled to report its quarterly results.

(Source: http://www.thestreet.com/story/11105880/4/crude-slides-below-key-technical-level.html)