Oil: Ready to Break Higher?

Nov.19.09 | About: The United (USO)

As the chart below shows, oil looks like it is trapped in a $76-$82 range. Don’t be fooled by that range, there is solid reason to believe oil could once again get close to $100, a level not seen since September 2008. Why?

Historically, the price of oil vs. gold has been between about 12:1 and 15:1. When the USD is losing value, the ratio tends to be lower (that is, oil goes up relative to gold as oil producers raise dollar-denominated prices to maintain the value of oil), and since 1/2001 has often been 10:1 or lower.

With oil at about $80/bbl and gold at $1146, the ratio is now 14.33. If oil just hits the higher end of its average (12:1) that implies it could go over $95.

Much will depend on the strength of the recovery and of the US dollar. Over the past 2 years the dollar has behaved as a safe haven currency, dropping when there is good economic news, and rising on increased fear. There are 2 clear current market trends:

  • Increasing global economic recovery
  • Continuing down trend in the USD

If these continue, a lower than average gold/oil ratio is likely and thus (assuming gold does not go below its current $1146 level) even higher price for oil (click on chart to enlarge).

WTI Crude Oil Daily Chart

Special thanks to fellow SA contributor Ashraf Laidi (Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets) and friend Munjid Albader for their inspiration & guidance.

Disclosure: The author has no positions in crude oil at this time, but does hold selected energy equities on a long term basis (ERF, PGH, and PVX).