Ready to Break, or Is It “Hit the Brakes” for Oil?

01/21/2010 12:01 am EST

Focus: COMMODITIES

Can the oil bulls catch a break as the as the Senate super majority is broken? Well, maybe they might have if it weren’t for the fact that China is hitting the brakes.   

The election in Massachusetts gave oil bulls a thrill, but breaking news out of China may change that bullish mood. The petroleum market reversed course as the market correctly predicted that Republican Scott Brown would pull off an upset victory in the Massachusetts special Senate campaign to fill Senator Ted Kennedy’s vacant seat. Or as Senate-elect Brown would say, “The people’s seat.” The man who will block the Democrat super majority and vote against the universal health care bill sent healthcare stocks soaring, helping inspire the Dow on to a 115.78-point rally and turning oil around on its coattails. Yet today, we may see the oil market come back down to earth as reports out of China may once again zap that bullish momentum.

Just when the oil bulls thought they might catch a break, China put the squeeze on. Reuters reported that the Chinese government has told several major Chinese banks to hit the brakes by making them increase their reserve requirement ratio by half a percentage point. Not only that, they told these lending institutions to stop lending money for the rest of this month. Reuters reports that lenders Citi Bank, ICBC, and Everbright Bank were all informed by the authorities to cease lending in another sign that China is trying to stop that China bubble from expanding. This is the type of news that should leave big skid marks on the backs of the oil bulls. Or perhaps a better way to say it is that this news should strike fear in the hearts of the oil bulls the same way last night’s election results should strike fear into the hearts of incumbent Democrats.

Adding to the bearish momentum are reports out of OPEC that they just cannot give up their cheating ways, and what is more, they admit it. OPEC compliance fell to 56%, down from 58% in November.

Bad news in the refining business as Chevron reports they will lay off workers as demand for oil products continues to squeeze refining margins. They are going to restructure their refining end, making it leaner and possibly selling or closing refineries.

We feel that the overall the oil market is headed down to the $40-per-barrel handle over the next few months, but at the same time, you have to be careful and respect the wide daily trading ranges. Yesterday’s action was a perfect example of what I am talking about. Long-term players can sell rallies and have a stop above $85 if you want to play for the larger move, but why not look at the ranges as well?

By Phil Flynn of PFGBest.com

Phil Flynn can be reached at 800-935-6487 or at pflynn@pfgbest.com to open your account. Also, tune in to see him each day on the Fox Business Network.

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