Oil Crisis Scenario
by Dr. Joe Duarte
|Thursday, May 06, 2004
The oil markets are about to redefine themselves. We expect that within several days, we will have seen either a massive top, or the beginning of a dramatic bull run to new all time highs in the price of the commodity.
Crude oil rallied, finally closing above $39 per barrel on 5-5. Overnight markets had taken the June contract to the 39.85 area, just shy of the magic $40 mark. Integrated oil stocks, as measured by the Amex Oil Index (XOI), see below, made all time highs, once again on 5-5. Oil service stocks fell on a downgrade by a Wall Street analyst, but came off of their worst levels by the close.
The supply figures from the API and the U.S. Energy Department showed supplies of crude oil that were increasing, but not fast enough to create a surplus. Meanwhile historically, the current supplies remain below what is considered adequate for balance.
Gasoline futures closed above 1.30 per gallon, suggesting that retail gasoline will remain above $2.30 in the foreseeable future.
The Philadelphia Oil Service Index (OSX) fell on negative comments from a Wall Street analyst on 5-5. But the index did not fall apart altogether, and continues to hold its own, although it closed below the 106 area, and still can’t seem to get above 110. The index moved just below its 50 day moving average, with the 106 area remaining an important pivot point, which is now a key support area. The index closed above 110 a few weeks above and consolidated. A long term move, if this move regains momentum could take the OSX to 140. The index rallied smartly on 1-20, and has reached an important resistance level, but had remained flat. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) made a new all time high on 5-5, having now set the stage for a major move higher. This is still a crucial juncture for the entire oil sector, as a failure in the near term could lead to a major top forming. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
In the current market, we recommend a copy of Successful Energy Sector Investing: Every Investors Complete Guide. The book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.
$40 Dollar Oil Spooks Market
A close above $40 for crude oil, if and when it happens, will have a major psychological impact on already shaky markets, as well as the political arena.
We may be in for a perfect storm type scenario.
The flip side is that the headlines on oil are starting to get very wild and crazy, which is the usual sign of a top. We’ve seen this before, and it has had no effect on the price of oil. This maybe another such time.
Another sign that the rubber band is getting stretched awfully thin is the record amount, $103 million, fetched by a Picasso painting at auction.
This is going to be an interesting year indeed.
Otherwise, not much has changed. The NYSE advance decline line has broken down on a daily and weekly basis and the action on 5-3 did little to offer relief here.
Aggressive traders should still be holding large amounts of cash, and should have several open short positions, even as they pay especially close attentions to stops, and begin to compile a shopping list in case the market begins to pick up steam to the up side.
If the current negative pressure remains unchecked, broad market measures, such as the Value Line Index and the Russell 2000 could see anywhere from 6-8% or worse falls.
The S & P 500 remained below its 20 and 50 day moving averages. Key resistance is above near 1160. Support is at 1086. The 200 day moving average for the S & P 500 is near 1073, providing bull market level support.
A Tale Of Two Really Big Stocks
We asked the question are oil prices so high now that the economy is about to slow down?
We suggested that the U.S. economy, was likely to be more efficient in using oil than most pundits might expect, and that there would still be some breathing room, even at oil prices above $40 per barrel.
But, that is not going to last forever. History shows, as Mr. Greenspan has noted, that every major downturn in the U.S. economy, has been preceded by an oil crisis.
Thus, a look at two major players in two different industries might give us a clue as to where the big money is flowing.
Goldman Sachs (NYSE:GS) is the leading investment bank on Wall Street. But the stock is in a down trend, whose start in February was a good clue that the current correction in stocks was on its way.
Even with recent bank and HMO mergers, GS, has not perked up.
The flip side is that Exxon Mobil (NYSE:XOM), a stock not known for its growth potential, is on the verge of a break out, to all time highs. If XOM rises above 46, we will be in uncharted waters.
The message here is clear. The market is expecting higher oil prices, at the same time, that it is forecasting a slow down on Wall Street.
Both parts carry the potential for major problems in the economy at some point in the future.
Yet, economists tell us that the economy is sound. And the Federal Reserve wants to raise interest rates.
The bottom line is that somebody is right, and somebody is wrong.
And that tells us that major things are about to happen, whose repercussions are going to be measured in years, not months.
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