Will Oil Break Out, Or Fail at Resistance?

At $72 and change, oil is currently trading at a key inflection point. As shown below, oil recently bounced nicely off of the bottom of its uptrend channel, and it is now butting up against resistance that formed when the commodity made its highs in June and July. If oil is able to break out above these short-term highs, there isn't much in the way of resistance until the $90 mark. With oil tracking so closely with the stock market recently, it's highly likely that the breakout will occur if the rally in equities continues.

Comments

[Bill L.:]

Underlying demand for petro end products has been weak... When oil's correlation to demand becomes inversely correlated, and its correlation to the dollar becomes almost -1, you know you're in a speculator fueled environment, not a long term demand fueled market. These typically end with a big move down. If the dollar stabilizes or shows any strength, I would get out of oil in a hurry, or if I were more aggressive looks for opportunities to short.

Aug 20 12:12 PM

[stockferret:]

If you believe that oil production peaked in 2005 (as I do) then there is little question that oil prices are going higher in the medium to long term. The real question is the short term. I think what we are seeing is a lot of traders putting on long positions at these levels because although there may be a pullback in the near term you can be pretty comfortable that 6 months from now $70 oil will be a distant memory.

I think that is what has been propping up the markets these last few months despite the flaccid demand. Do you wait for a big pullback to open a long position? What if there is no big pullback because enough people believe in peak oil to keep buying when there is a small dip? I've been buying DXO on each pullback and selling when it got + $.50 - .75 under its belt while maintaining a core long position. Working well so far.

Aug 20 01:14 PM

[dubrunner:]

All those tankers that got diverted due to storms this week..anyone buying that? If so we should see a big building in inventories to make up for this week. Also, is the contango gonna cause the big boys to starting relieving themselves onto the market? Cost of offshore storage is rising correct? This is a delicate situation, since I highly doubt Bernanke/Obama is going to allow for the price of oil to hit 80. People will be so pissed off, and the politicians know if would be political folly to allow this to happen, especially since they have a hand in the oil mtk manipulation to a degree at this point in time...

Aug 20 02:22 PM

[JeffDB:]

I'm sure the politicians don't want that, despite the feeling among some that many Obama supporters would like to have higher oil prices to promote conservation, reduce greenhouse gases etc.. It would certainly put a damper on hopes for getting the economy moving. In a good direction.

But, I'm not sure exactly how Obama or other politicians could prevent prices from going up to those levels if that is where they are headed. The primary options as I see them would be to raise interest rates to reduce inflationary fears and slow the economy further, but I think that would likely be more painful than the higher oil prices, or to sell from our strategic petroleum reserves, which I don't think would be a very smart move and would not likely be done at the $80 price point.

It seems to me that unless they are somehow controlling the prices already that they would be somewhat powerless in the face of rising prices. I don't think Bush was pushing for $140+ oil heading into the presidential election cycle either, but the market can sometimes have a mind of its own it seems to me.


On Aug 20 02:22 PM dubrunner wrote:

> This is a delicate situation, since I
> highly doubt Bernanke/Obama is going to allow for the price of oil
> to hit 80. People will be so pissed off, and the politicians know
> if would be political folly to allow this to happen, especially since
> they have a hand in the oil mtk manipulation to a degree at this
> point in time...

Aug 20 03:14 PM

[jstratt:]

Thank you for many outstanding insights!

Aug 20 11:29 PM

[Ferdinand E...:]

Not much meat in this article, but enough for me to pass the word that oil at $90/b is not good news at all.

Aug 21 09:11 AM

[The Greates...:]

Oil in our government:
Combined with its $6.8 million outlay in the first quarter, Chevron spent about $12.8 million on lobbying in the first half of 2009, the fourth-highest tab for companies and organizations that file disclosure reports, according to data from the Center for Responsive Politics.
Chevron, the second-largest U.S. oil company behind Exxon Mobil Corp., spent $3.2 million on lobbying in the second quarter of 2008.
In the most-recent period, Chevron lobbied on a variety of issues, including legislation dealing with market speculation and manipulation and Federal Trade Commission rulemaking. It also weighed in on environmental matters and industry-specific issues such as hydraulic fracturing, according to the disclosure form filed July 17 with the House clerk's office.
Besides Congress, Chevron lobbied the departments of Energy, State, Commerce, Treasury as well as the Environmental Protection Agency and the Executive Office of the President.
Among those lobbying for Chevron were Lisa Barry, the former principal deputy assistant secretary at the Commerce Department, and Judy Blanchard, former deputy staff director for the House Committee on Oversight and Government Reform.
www.opensecrets.org/

Aug 21 09:17 AM

[toobad41:]

Looks like you missed the boat. The boat left the dock way back in February or March when oil was in the $30 range. The upside potential from where we are now is not too exciting to me.

Aug 21 09:36 AM

[john s. gordon:]

oil futures continue to be dominated by speculation.
this territory is not for the faint of heart.
> jack

Aug 21 09:57 AM

[auto44:]

If it is moving in tandem with tthe market, why buy it?

Aug 21 10:45 AM

[William M. ...:]

It's just keeps amazing me that just ten years ago the American economy was firing on all cylinders and oil was hitting new lows, under $15 a barrel. And now America, the number one consumer of oil, is in our worst slow down since the 80's and oil only stayed below $50 for a couple of months and its now $75 and our thinking is $60 is cheap.

Yes, I know Peak Oil plus China and India along with the biggest wack the declining dollar. Love to see you guys put together a 10 year and 50 year chart of the Dollar to Oil values. We know it's been inversely correlated over the last 10 years but I'd like to see if that held true from the 60's-90's too.

Aug 24 12:08 AM