Oil Due for a Breakout

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 2.4 percent*

Gold traders finally had their breakout when the COMEX December contract closed above the $1,038.80 level set in March 2008. The move was a long time coming, as an interim low near $710 had to be negotiated in November. Now, metal traders are aggressively probing uncharted territory on the upside.

This has got oil traders wondering if there's a breakout in their future. After all, nearby crude futures have been locked into a trading range since June, including a midway pivotal low, not unlike gold's.

So, is black gold ready to break to the upside?

Let's look, first, at how the players have lined up for an oil scrimmage. Last week, commercials got a little bit longer, indicating less hedge interest around the $70 mark. Money managers, however, got a lot longer. These two cohorts are pace-setters as they represent the largest chunks of the crude market's net open interest. There's a bullish bias growing in the oil market.

Bullishness is also reflected in the market's key technical indicators. The interim low in mid-July proved to be, in fact, a successful test of support. The 50 percent retracement level of the February-June rally held and spawned a bounce-back that now has MACD and RSI flashing positively. Even though overbought, stochastics as well favor the long side (you can find out about some of these indicators in "The Gold Market's Tech Clues").

NYMEX Crude Oil (Nov. '09)

Looking at these factors, some traders might think crude's spoiling for a run to the $90 level. But then the differences between gold and oil's former trends have to be considered. Gold was in an ever-rising market before stalling; crude, however, had plunged from nosebleed heights. That makes overhanging supply a potential spoiler. It's safe to say that nobody's got a bullion cost base higher than gold's current level; you can't say that about oil.

All the more reason for traders to tread gingerly on the long side.

In the intermediate term, the August reaction high at $74.18, basis November, has heaved in sight of bulls as the next upside target. Above that, the June rally peak at $75.83 invites attack.

*Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index from this date one year ago. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.2 percent.

Comments

[jerrydd:]

Can you say bubble? Oil already is in one. And if it goes any higher as it will, just not in the next 6 months, the efforts to replace it will grow, leading to its demise in about 10 yrs.

Personally I'd like to see it get more expensive as it will sharpen the minds doing energy policy against subsidizing oil any longer.

Oct 14 09:18 AM

[Ferdinand E...:]

Hmm. Despite the pretty diagram, I prefer to believe that a large increase in the oil price from the present level is the world possible news for the international macroeconomy.

Oct 14 10:45 AM

[AndrewBaker:]

Markets are now so silly that a rise in oil is only to be expected. It is black gold, and in that guise will be bought in preference to holding dollars and with little regard to supply and demand considerations.

As long as one is quick to move, going long black gold could be profitable, at least in the short-ish term.

Oct 14 12:13 PM

[bigbear4511:]

This economy cannot afford crude oil at this price. It could stall the recovery. With prices going up OPEC is not going to be able to maintain the production ouput cut. Cheating eventually happens as the Nash Equilibrium states. This is seen as the cuts have been reduced to 62% of the 4.2 million reduction. With prices like this OPEC members will cheat even more.

Oct 14 02:22 PM