Oil plunges as the crude market seeks direction

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In trading, there's a saying: the trend is your friend. Energy traders like to add: and no trend is nobody's friend. And "no trend" that certainly describes today's crude market.

Oil bears deploy technically correct trades and are soon hammered by a market reversal. Oil bulls set longer term buy positions, only to see record-high oil inventories take center stage in mid-rally, stopping out their positions.

On Wednesday, the the bulls were hurt again, as oil plummeted $3.91 to $63.32 per barrel -- crude's biggest price drop in three months -- on a larger-than-expected increase in U.S. oil inventories, and amid concern the U.S. and global economic recoveries will not be strong enough to reduce those high distillate inventories.

The oil market is rudderless at this juncture, prepared to burst higher or plunge lower, depending on what each day's key fundamental implies for supply and demand. On Wednesday, it was U.S. stockpiles of crude oil, which increased 5.15 million barrels to 347.8 million barrels for the week ending July 24, the U.S. Energy Information Administration said. Analysts surveyed by Bloomberg News had expected inventories to decline by 1.5 million barrels.

But the oil bears are not thinking conquest and plunder. And how can they? In this market all it takes is one fundamental or data point in the other direction -- a report of increased GDP growth in China or better-than-expected U.S. factory orders, for example -- to trigger a market reversal, and stop-out many short positions. And a quick review of oil's chart shows just how volatile and chaotic oil has been recently: in eight months oil has plunged from $110 to $35, reversed to $73, dipped to $58, then jumped to $67 before today's sell off to $63. Try projecting energy costs in that type of market. And people wonder why airline executives' hair turns gray quickly.

Further, the analytical community has been of little help, with oil price forecasts varying greatly. Goldman Sachs sees a return to $85 and then $95 oil in 2010. Meanwhile, University of Calgary Economics Professor Philip Verleger says oil will collapse to $20 per barrel this year on a recession-based oil glut.

Given the unresolved nature of future global oil demand, all one can say about the direction of oil prices moving forward is what Mark Twain said about New England's weather: "If you don't like the weather in New England, wait awhile."
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