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While we cannot rule out ongoing gains in crude oil directly ahead, we have to believe that prices have recently gotten a little rich relative to what near term supply and demand fundamentals would indicate. From a technical perspective, crude oil has also been showing signs of being technically overbought, with open interest consistently posting readings above 1.32 million contracts and the recent COT positioning report showing a combined Non-Commercial/Non-reportable net long reading of 139,000 contracts. In fact, if one were consider that since the report’s mark-off date May crude managed to extend the rally by another $4.00 per barrel, crude oil has likely seen its spec long position grow even larger and is probably close to a moderately overbought standing. Even though we expect to eventually see nearby crude oil prices in 2010 reach highs in excess of $90 and perhaps even $100 per barrel, we currently see a slower than expected US recovery pace, residual Euro zone debt issues, periodic tightening threats by China and persistent strength in the Dollar as problematic to energy prices gains.
However, our biggest concerns are weak gasoline demand readings and burdensome supplies. Despite seeing very low US refinery operating activity, US gasoline stocks have not shown any sign of tightening. One might explain away the burdensome stocks situation as being a result of the slack seasonal demand window that will be rectified as we progress toward the summer driving season. In the meantime, we suggest that traders look to implement short futures and long multiple call strategies in an effort to capitalize on a potential corrective slide in the near term but ultimately in the hopes of catching the next wave higher in energy prices off the combination of growth and seasonal demand. We currently see May Crude oil prices as being prematurely strong and in need of a correction back down to levels below $75.00.
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