This analysis is from Sheena Martin, Contributing Editor, Investment U
Wednesday, December 9, 2009

The fundamentals of investing in crude oil are changing.

Tuesday marked the fifth straight day that oil futures fell on the NYMEX, extending their losing streak to the longest in five months. Oil is now cheaper than it’s been since the first week of October.

On December 2, West Texas crude oil stood at $76.60 per barrel. But less than a week later, it had fallen to under $73 – almost a 5% drop…

Such movement indicates weak fundamentals. Inventories are already overfilled and analysts expect last week’s report to show a 600,000 to 800,000-barrel build in crude stocks.

In addition, those same analysts project a rise of 1.8 million barrels in gasoline stocks, compared to last week’s four-week, petroleum average coming in at just 18.5 million barrels per day – the lowest level since July 10.

That means supply outweighs demand by about 18-fold at a time when crude oil is finally starting to move based on supply and demand. Hardly a bullish sign for the commodity.

The Dollar Weighs In

If it’s lucky, crude oil prices might see a little bump higher during the holiday season. But prices could fall below $70 shortly after the New Year, especially considering the U.S. dollar’s movement these days.

As worldwide investors continue to worry about credit in Greece and Dubai, equities have taken a hit and the U.S. dollar has advanced. In fact, the Dollar Index had its biggest gain in 11 months on December 4.

And when the Federal Reserve eventually raises interest rates, that would likely push the dollar higher and send oil lower, since they normally move in opposite directions.

With that ominous cloud hanging over the market, investors are trying to lock in profits by exiting their long oil positions before the end of 2009.

And with good reason: Without financial institutions propping up the market, expect oil prices to continue to decline.

Sheena Martin

View original at: Investment U

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