Oil: Is the Top In? Stocks:Trying to Launch an Oil Rally

Stocks are focusing on oil prices and the Fed. Oil looks to have made a short term top. But the Fed is talking tough about inflation, and hinting at still higher interest rates. The recent strength in the dollar, and lower yields in treasury bonds suggest that money is trickling back into the U.S.

The pre-market stock index futures were flat to slightly higher on 4-8. The U.S. Dollar was flat., but slightly higher. Asian markets closed higher . European markets were higher. U.S. Treasury bond yields were slightly higher . The U.S. Ten Year note was trading with a yield of 4.48% in electronic trading. Crude oil was above $54. Gold was trading near $428.

Today's Analysis: Traditional Signs Of A Top Are Visible

The shouts of oil prices remaining high "permanently" are getting louder. Last week Goldman Sachs called for crude oil prices to rise to $105 per barrel. This week, the World Bank described a similar scenario. Venezuela's oil minister also talked about oil prices remaining high. And now the International Money Fund is warning of the risk of a "permanent," oil shock.

A rather prominent fellow approached us yesterday, and with a gleam in his eye that we haven't seen in some time, pronounced that the current market is a "secular" bull market in oil, and that it is a "once in a lifetime" opportunity. The fellow then asked us which discount futures broker would be the best one for the futures trading account that he was about to open.

Hardly a shoe shine boy, this fellow, who is a fairly good investor in stocks, real estate, and other things, was clearly captivated by the potential for making money in oil. His glee, however, in our opinion, and when placed in the context of the current action in the oil markets, might be a significant development, and could be that "widows and orphans" throwing in the towel moment.

Few things, especially, in the commodity markets are permanent, other than prices will fluctuate. From a contrarian standpoint, when everyone agrees on something, it usually means that the opposite is about to happen. But the presses are now burning with hot oil stories.

The New York Times reported: " The Energy Information Administration, an arm of the Energy Department, said it expected the price of unleaded regular gasoline to hit a peak national average of $2.35 a gallon in May and to average $2.28 from April through September. Last week the average price was $2.22."

The Financial Times, referring to an IMF report that "Oil prices will continue to present a serious risk to the global economy." FT continued: "The IMF forecast in its World Economic Outlook that crude would cost $34 a barrel in 2010 in today's money and would rise to $39-$56 a barrel in 2030. The predicted prices are well above market and oil industry expectations. They are also much higher than the latest long-term forecast from the International Energy Agency, the oil watchdog, of real oil prices of $27 a barrel in 2010 and $34 a barrel in 2030. ["The shock we see is a permanent shock that is going to continue... and countries need to adjust to that,"] said David Robinson, deputy IMF chief economist."

According to FT.com: "The IMF based its forecast on a sharp rise in global oil demand, particularly from increased vehicle ownership in China, and non-Opec production reaching a plateau around 2010. It expects oil demand to grow at a yearly rate of 2.1m barrels a day above the 1.5m b/d the market considers sustainable to reach 138.5m b/d in 2030."

And boy, is the field of perma bulls in oil getting crowded. According to the Wall Street Journal: "Last summer, one-third of economists who participated in The Wall Street Journal Online's economic forecasting survey said a recession would follow if crude-oil stuck in between $50 and $59 a barrel -- exactly where futures prices have traded since late February. But the economy isn't in peril today and, in the latest forecasting survey, the economists have changed their minds. None feel that $50 oil will trigger a recession. Thirty-one percent said they feel oil would have to be sustained at $80-89 a barrel to snuff out growth, while 48% believe crude would have to top $90."

The IMF called on emerging countries in Asia, which this year would account for 40 per cent of the increase in oil demand, to curb their fuel subsidies. Several countries in the region, including China, Indonesia and Malaysia, have recently increased petrol prices in an attempt to reduce consumption.

Of course the political games are just beginning. Things have reached a point where Congress is actually going to be debating an energy bill sometime this year. According to the New York Times "Mr. Bush discussed energy prices with his cabinet on Tuesday and is sure to raise the subject during a meeting being planned for this month with Crown Prince Abdullah of Saudi Arabia, the world's largest oil producer. But Democrats say they intend to use the renewed focus on energy issues to revive their case that Mr. Bush and Vice President Dick Cheney, both of whom worked in the oil business, are more interested in helping oil companies than in helping consumers. And several recent polls suggest that the spike in oil prices and the resulting rise in gasoline prices have undermined Mr. Bush's political standing."

The Democrats and the Republicans are starting to spin the story increasingly. '["This is not just an economic problem,"] said Mark Mellman, a Democratic pollster (in the New York Times) ["It is also, in the public judgment, a national security problem. There is a widespread belief in the country that the problem could be solved or a real dent made in it, but that this administration, because it is tied to big oil, is unwilling to take the steps necessary to reduce our dependence on foreign oil."]

The Times added: "Administration officials said they were assuming that the surge in prices would help put pressure on Congress to pass Mr. Bush's energy plan. Already, Republicans in the Senate have shown for the first time that they have the votes to include in that bill the authorization for drilling in a section of the Arctic National Wildlife Refuge."

Bloomberg Survey Says Prices Are Likely To Fall

And while the IMF and others are calling for an upward price spiral, according to Bloomberg: "Crude oil futures in New York will probably fall next week as increasing production by members of OPEC boosts U.S. inventories, a Bloomberg survey showed."

The news service's weekly survey of analysts, whose results are 67% accurate over the long term, in its latest round said that "Thirty-two of 62 analysts and strategists surveyed by Bloomberg, or 52 percent, predicted oil prices will decline. Fifteen, or 24 percent, said they will rise, and fifteen forecast little change. Last week 58 percent of respondents expected prices to fall, the most bearish result since Nov. 19."

Is A Supply Glut Finally In The Making?

The supply statistics in the United States, and futures prices are painting a starkly different picture than the one being bandied about by the IMF and others.

Gasoline for June delivery is 9% off of its high, reached within the last few days, with a 5% drop in prices on 4-7. Bloomberg reported heavy selling by "hedge funds and other speculators sold crude-oil and gasoline futures on signs that higher U.S. refinery output will increase gasoline supplies."

According to Bloomberg, OPEC production is up, and inventories of crude, and now gasoline, are starting to build. "U.S. oil inventories gained 2.4 million barrels to 317.1 million barrels last week, the eighth straight increase, an Energy Department report on April 6 showed. The rise in stockpiles came as OPEC boosted production targets to prevent near-record prices from damping world economic growth."

"OPEC members increased daily production by 238,000 barrels to an average of 29.92 million barrels last month, according to a Bloomberg survey of oil companies, producers and analysts. It was the highest output since November. In October, OPEC pumped 30.54 million barrels a day, the most since December 1979, based on U.S. Energy Department records."


Tops in commodities and other markets are usually marked by agreement on the part of the trading crowd that prices can only go higher. These consensus moments are usually marked by stark predictions from brokerage firms, think tanks, international organizations, and of course the inevitable drama from Congress.

This is in contrast to bottoms, where none of the above could be found with any sort of opinion that suggests that prices are about to start rising.

No one knows if this is "THE" top in oil. But, at least in the short term, the usual pattern that marks a top of some sort is evident.

Oil Market Summary And Outlook: Fed Still Worried About High Energy Prices And Inflationary Pressures.

If oil is making a top, many things that are now being factored in, such as slower global economic growth, territorial disputes, and expansions of ideological based regimes in South America, Africa, and elsewhere are going to have to be re-evaluated.

The Federal Reserve, or at least one member, Governor Poole, is not changing his mid about inflation. According to Reuters: "The U.S. economy faces some ["pretty obvious"] risks of inflation but the Federal Reserve will act with vigor to keep them under control, one of its top policymakers said on Thursday. In hawkish remarks from an influential member of the Fed's interest rate setting committee, St Louis Federal Reserve President William Poole said energy costs and renewed company pricing power had pushed up the danger of faster inflation."

Poole is not a voting member of the FOMC this year. But, others, such as Philadelphia Fed President Anthony Santomero, although slightly less aggressive, are also sounding a cautionary tone, adding that "the Fed was "clearly" not behind the curve on inflation and noted that long-term interest rates showed that markets agreed," but that the Fed had "to remain vigilant on the inflation front."

Crude oil prices were trading below $56 in overnight action. Oil stocks did not confirm the most recent high in crude prices, and were fairly weak on 4-7, suggesting that we could see more selling. The June contract closed below its 20 day moving average, and looks headed for a test of the $52 area, its 50-day moving average. A close below $52, could easily take prices to $45 in a hurry.

To be sure, this remains a bull market in oil until proven otherwise, given the fact that crude futures recently made new all time highs, and that key support levels, such as the 50 day moving average for the June contract remain intact.

Investors should remain wary of the oil market, and should use extreme caution in any exposure there.

The Philadelphia Oil Service Index (OSX) looks better than XOI, and may still to challenge its recent highs near 146. OSX is above its 20 and 50 day moving averages. Volatility will likely increase here in the next few days. 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) has made three lower highs and an equal number of lower lows in price since topping out in February, despite a series of dramatic new highs in the commodity. This is a sign that the oil market may be trying to make a top. The scenario would change if XOI took out the old high near 893.

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Dr. Duarte's 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.


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