Oil: Time for Caution

There has been no ending sight to the crude oil advance. From $70 per barrel in September 2007 to $142  today, oil has been on the steady rise along with extremes that we saw in the past few months. It has gone through all technical targets on the upside, and we are nearing a major psychological target of $150. In times like these, nobody knows what will happen next, and whoever claims to know is full of crap (excuse me for the technical term). Thus, I would not be gambling with crude and would stay on the cautious side rather than being aggressive.

Based on the chart below, there are no signals of crude easing off; in fact it is consolidating at the highs, which is usually pretty bullish.  I think we will definitely test the $150 level before we can see any major move to the downside.  As you can see from the chart, we are in the up trending channel and the top of the channel is $150. On the other hand, we do see some divergences in the MACD and overbought RSI on the weekly charts. Also, we are coming into a “squeeze”, meaning volatility is decreasing and momentum is decreasing on the upside, so any move outside of the squeeze should be significant. I personally would not initiate any shorts because of divergences or overbought indicators, but I would advise to be cautious.

On the fundamental side, as T. Boone Pickens has said, we have demand that exceeds supply by 2 million barrels a day. However, at this level of gas prices, we do see some of the demand easing off due to Americans driving less and the slowdown in the global economy. We also have the Fed finally noticing the out of control inflation, and most likely will start doing something about it by raising interest rates, which should ease off oil prices a little. On the fundamental side, we should see some relief in the near future. In the long run, I think that these prices are not sustainable and we will see a final blow off before we come down to about 100 and stabilize.

Finally, cycles are pointing to the peak in oil around 2009-2010.

Comments

[rtbob99:]

I am sorry but talk of oil returning to $100/barrel without being triggered by a severe worldwide depression is optimistic blather.

Yergin has been engaged in such talk for several years now and has been consistently wrong for the entire time.

Cycles be hanged. This is not a cycle. Demand surpassing steepening production decline is not a cycle, it is a one time irreversible fundamental change in the oil picture.

Please rethink.

2008 Jul 02 01:13 PM

[Karl Francis:]

You cannot deduct fundamental facts from Boone Pickens' talk. He is a speculator, following trends and arguing in favor of those trends. After he has decided to go short, he will appear in the media and telling you that the world is drowning in oil.

2008 Jul 02 02:22 PM

[Jason Rines...:]

Both above comments appear correct. This additional oil shock not yet fully felt seems the nail in the coffin for overleveraged consumers, 49% of our GDP. I forecasted chance of depression (never mind the chance of recession) at 50%-50% in June of 2007. I now consider it at 90% unless we see a massive government subsidy into energy independence and right now, never mind when the new guy gets the baton and enacts policy in April of 2009.

Consider we are transitioning from a failed economic hyposis of 15 years of excess. My numbers now show GDP shrinkage of 20% by 2011, is that a classic definition of depression? I am sure at that time offshored U.S. companies via CNBC will chime in and argue that a depression is not occuring.

If and when the financial system crashes I am sure 97% of the U.S. population will hear about the upsides of government rations of wheat pasta and cheese as there life savings instantly dissapear. The failure is on government. The word 'public servant' has lost meaning on the hill for the majority of the selfish mental dwarves. But all in all, human nature is cyclical and the American people will pull out of this on top, but let's truly hope the worst potential downside of major resource wars and financial collapse don't occur, but nonetheless, preparing for the worst but hoping for the best is always the best strategy.

2008 Jul 02 04:01 PM

[Sophisse:]

Pickens may speculate but he is not just a speculator. He placed the largest order for wind turbines that GE has ever received. He is going to build and operate them. That is not a speculative act - he is going to be stuck with those things for their 30 (50?) year operating life.

2008 Jul 02 07:05 PM

[ffs:]

in 1960 one silver dollar{one oz.} bought four gallons of gasoline .Today one ounce of silver also buys four gallons of gasoline.I am not an economist but as an average person I percieve that the more the printing press is used to create money the less that paper money is worth vis a vis natural resources

2008 Jul 02 09:55 PM

[Eric Fox:]

"we have demand that exceeds supply by 2 million barrels a day."

Please provide proof for this statement. This is the last report on production I saw:

"World oil supply rose to 86.6 million b/d in May, up nearly 500,000 b/d from April's 86.11 million b/d as production rose from OPEC, China and the former Soviet Union, the International Energy Agency said Tuesday. OPEC raised its crude supply to 32.31 million b/d last month, up from 31.91 million b/d in April, the IEA said in its latest monthly oil market report."

Mr. Pickens in April said this:

"There is only 85 million barrels of oil globally in the market coming a day and I don't think you can increase that 85 million."

2008 Jul 03 07:24 AM

[brillopad:]

"end in sight"

2008 Jul 03 12:20 PM

[richjoy:]

blah, blah, blah. OK...the world has a serious LIQUID FUELS problem. Econ 101 follows:

Worldwide oil demand has nudged or even exceeded supply. That means prices rise, and keep rising, to squeeze out the marginal buyers.

At the moment, oil is subsidized in many countries where oil demand is growing far faster than in the USA (though with about 5% of population, for years we have consumed about 25% of the world's oil...now billions more want what we have). Therefore, even if we decrease our oil demand by 5 or 10%, that savings will soon be lost against a much faster growing world demand among the other 95% of the world's population.

Reducing oil to $100/barrel and below is on the horizon, and $50 or less, is just over the horizon. It is quite likely there will be much more demand destriction than most can visualize. Because:

As gasoline reaches $6, $8, and $10, worldwide demand destruction will grow rapidly as fuel consumes a larger and larger portion of incomes, resulting in tens of thousands of large and small businesses are elimated, and millions of jobs lost. That tipping-point (and severe recession/worse) is more likely than we like to think. We may well see $2 gasoline...and wish we hadn't.

Unfortunately, it will be about 10 years before new oil fields and new liquid fuels, or enough hybrids, are in place to add substantially to today's supply...if we can ever agree to start, and what needs to be done!

It is that simple...and that serious to your economic future (and sadly, that of your children and grandchildren). This goes FAR beyond the bankruptcy of car companies, airlines hotels/resorts, state and city governments. Gasoline is life to billions!...wars have been fought for less!

2008 Jul 03 08:48 PM

[jjason:]

We can bring down the price of oil a little at a time.

1. Use less.

2. Tell your Congressman to increase margin requirements for commodity traders.

3. Start heating water with solar collectors.

All of these things can be done in one to three months.

DO NOT BELIEVE WHAT YOU ARE TOLD ABOUT SPECULATION HAVING NOTHING TO DO WITH HIGH OIL AND GASOLINE PRICES.

The Commodity Futures Trading Commission has not done their job properly and Congress needs to fix what is called " The Enron Loophole"

Go to:

http:star-telegram.com/ed_w...

to learn how you and I are being cheated. Then copy the story and send it to your friends.

PS. Senators Barack Obama, Byron Dorgan and Maria Cantwell are aware of the "price fixing" and so is Governor Jon Corzine of New Jersey.

2008 Jul 04 05:18 AM

[surgcare:]

JJASON I am very much looking forward to a democratic congress and president so I can watch the economy tank and oilprices sky rocket . I'm long oil . I'm also sure you'll be furious people are making money off of high oil prices when its your uninformed naive beliefs that cause the situation .

2008 Jul 04 06:59 PM

[cynic69:]

rtrob99 hit the nail on the head. I am ready to short oil when the world economy starts to decend into chaos.

2008 Jul 05 11:05 PM