Is Crude Oil Breaking Out?

As I write this, spot crude is trading up $2... are we seeing a breakout?

I previously posted about crude oil forming a falling channel pattern, and it seems to be setting up near resistance. Today we might be seeing the first signs of this breakout. We'll have to see if it holds on to gains by the closing bell, but this is in line with the inflationary theme in the market.

I've said before that the Fed will stick with its expansionary policies (buying back treasurys, agency debt, low rates) for as long as the economic recovery is not on firm footing. While it's hard to trade stocks in general given the overbought condition of the market, oil is something I'm more comfortable with given that it has a proper set-up.

I have gone long on the U.S. Oil Fund (USO) in my model portfolio. The chart below is for WTI Crude Continuous Contract, and is updated as of Wednesday. I've chosen USO over the United States 12-Month Oil Fund (USL) given the former's focus on the front end contract (USL is diversified into contracts for each of the 12 months). It's also a bet that we will reverse from contango to the more traditional "backwardation" scenario in oil. This makes more sense since I am betting on an economic recovery.

Meanwhile, we have to take as a leading indicator the recovery in Australia and other emerging markets (including Asia and Brazil) which weren't hurt as much during this recession. The fact that the ECB, the United Kingdom and the US are not ready to raise rates will support the recovery for an extended period of time, and when the recoveries in these regions are in firm footing, they will add further fuel to the fire. Short of being ultra-bullish, we have to continue monitoring the situation in the US dollar, as this could potentially derail this breakout in oil (also stocks).

Disclosure: Long -- USO, GLBL

Comments

[ETFdesk.com:]

Jim Rogers: Oil's Going to $200, Commodities Boom Will Last 20 Years bit.ly/TVzCO

Oct 09 02:09 PM

[carey_jim:]

If the world was a rational place and all the men and women lived happily together at the Playboy mansion, oil would climb to a $1,000 a barrel.

But people would soon notice that there was little need to leave the mansion, except to send the servants out for supplies once a week and that would cause oil to plunge back to about $2 a barrel.

That's why it's so hard to make money in the futures market.

Brooke's Law says it this way:

Whenever a system becomes completely defined, some damn fool discovers something which either abolishes the system or expands it beyond recognition.

Oct 09 02:25 PM

[carey_jim:]

If they aren't laughing AT you then you aren't telling the truth.
--Confucius
If they don't laugh at your jokes then they don't want to hear the truth you are trying to tell them.
--Lenny Bruce
If they SHOOT you for telling a joke then you are living in a totalitarian regime.
--Charlie Chaplin

Oct 09 05:05 PM

[Crude Oil T...:]

If the crude oil bulls can't push this market through resistance at 73.16 soon, bears will have the advantage and all of the bullish momentum will evaporate. Bob Prechter's call for a near term bottom is getting talked around by a lot of commercial traders, and if it get's any traction we will trade to the cluster support at 58.32. Then the bulls can eye their $90 oil. But I don't see it until then.


More numbers at crudeoiltrader.blogspo...

Oct 10 07:12 PM

[Gary A:]

Bottom line, you raise gas to 4 bucks a gallon and people will park their cars. You drive mile to 5 bucks a gallon and people will quit feeding their kids milk. It happened before and it can happen again.

Asset inflation only works when the work force gets raises to pay for it. That isn't happening and likely won't. Americans want sales, not asset inflation.

If Bernanke does not figure this out this battle will get ugly.

Oct 11 11:23 PM