What Is the Next Important Price Level for Crude Oil?

03/23/2015 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

In light of the status of the refiners and the continued oversupply, MoneyShow's Jim Jubak discusses his outlook for crude oil price and what he thinks is the key level to watch.

Let's talk about $40 a barrel oil. Now what we're seeing in the market in March as we move into April, we're seeing typical seasonal weakness. This is the time of year when US refineries shut down for maintenance to switch over from the demands for heating oil in the fall and winter to the demand for gasoline.

You've got a lot of refineries being shut down for maintenance and therefore, they're not in the market buying oil and therefore, you're seeing crude inventories climb, crude inventories already at all-time highs.

What you're seeing is more additions to that and that on top of the general background, which we're seeing a huge plunge as global supply outraces not so great global demand has led to this plunge. In terms of looking further out for fundamentals, we're still looking to see some decline in US production. It looks like in March the projections are that US production is going to climb to 9.4 million barrels a day, which will be something like a 42-year high so you're not getting any relief there but the seasonal thing is what's important.

What we're seeing is oil drop—this is West Texas Intermediate—drop back down to near $40; $40 has been resistant; it's kind of a psychological level. There's a good chance that we will be able to go through $40 on fundamentals but I think if you're a trader looking to go long/short, play the hit, play falling oil against, therefore, the rising price of airline stocks.

$40 is the place where you might want to say, “well, I'm not at all sure that I'm going to get much more of an easy money bounce out of this so maybe $40 is where I'd like to close my short positions, maybe where I'd like to sell my hedges if I've got hedges like American Airlines group (AAL).

All those things kick in at $40 and it's time to reconsider everything. What it looks like, I think, with April being the traditional high for maintenance shutdowns, that oil is going to go down to that level. It was about $43 in the middle of March. Wouldn't be surprised to see it test $40 and that's really what you ought to be thinking about. Where's the easy money? This is a trading market for oil. Is it going to bounce back from here as it's done over and over again or are we going to go back down to $40 and then to $35? I think the smart thing to do is to assume this is a floor easy money and if it goes down further, don't chase it there, just let it go.

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