Greenspan's Oil Talk - Market in Holding Pattern
by Dr. Joe Duarte
|Wednesday, April 28, 2004
Greenspan's Bullish On Energy
Fed Chairman Alan Greenspan's remarks sparked a rally in the oil stocks. The Amex Oil Index (XOI, see below) scored an all time high on 4-27, the second one in the month of April, with the first being on 4-10.
We agree with Mr. Greenspan, and we said it over the weekend on CBS Marketwatch, in our Op Ed piece titled "Oil: new bull market or last gasp?" In the article we noted that although traditional signs of a top in oil were in place, " state attorney generals (having) for months been questioning whether high gas prices at the pump are the result of price gouging by the oil industry, oil analysts being mostly in agreement that oil prices will hit $40 per barrel and newspaper headlines as well as the nightly news running nearly daily stories about the price of gasoline hitting new all time highs on a daily basis," that we continued to see either steady prices above $35 per barrel or moves up to the $37-$38 area."
We further added that we were likely at "a major inflection point in the energy markets, and that this time, may indeed be a bit different."
Thus, we found it interesting that Mr. Greenspan, according to CBS Marketwatch, told a Washington Conference on 4-27 that "after years of benign prices, contracts for delivery of energy goods six years from now have spiked higher, reflecting a new balance between supply and demand."
The Fed Chairman note that the oil markets were keeping prices higher than would be expected as "presumably reflect (ing) fears of long-term supply disruptions in the Middle East."
We found the timing of Mr. Greenspan's remarks interesting, since they came on a day in which the technical juncture of the energy markets was suggesting that indeed a break out in the sector was likely. As we've stated before, Mr. Greenspan is and avid chartist, and according to Bob Wooward's "Maestro," the Fed Chief sports an amazing array of technical analysis tools and databases.
More interesting, Greenspan, who has commented bullishly on natural gas before, added, as quoted by Marketwatch, "Clearly, the gas trade has a long way to go. If North American natural gas markets are to function with the flexibility exhibited by oil, more extensive access to the vast world reserves of gas is required."
Our conclusion, is that even if there is a natural correction in oil prices from current or higher levels, as we stated in our Marketwatch piece, "the days of $25 per barrel of crude may be gone for good, and nobody (other than Greenspan, which puts us in good company) seems to be paying attention as to why this is happening."
The American Petroleum Institute and Department of Energy figures will be as important as ever, today, given the current climate in the Middle East, the recent attacks on Iraqi oil installations, and the unfolding drama in Russia with Yukos. A surprise drawdown in stocks could send crude oil above the $38-$39 per barrel, which would make a move to $40 quite possible.
According to CBS Marketwatch "most analysts expect the Energy Department and American Petroleum Institute on Wednesday morning to report increases in crude and gasoline supplies for the week ended April 23."
Reports of OPEC threatening to raise its target prices by $4 per barrel as well as of Saudi Arabia's intention to keep prices steady have also given the markets reasons to fret.
Still, we are always weary of a consensus in any market and note that while all the evidence points toward higher oil prices, that makes the market ripe for disappointment.
Crude oil futures closed above the $35-$37 range on 4-27, and were holding up in pre U.S. trading on 4-28. The contracts as far as June 2005 remain above $30, again predicting that the price for oil has reached a new long term trading range. More interesting is the fact that the December 2004 contract is above $35, while the September 2004 contract is now above $36, closing in on the June price.
This gives short term confirmation to Greenspan's remarks.
Oil stocks continued to hold their own, and are among the best looking charts in the current market. Especially interesting are the charts of several of the majors including Exxon Mobil (NYSE:XOM).
The Philadelphia Oil Service Index (OSX) ended 4-27, very near a significant break out. The index remained above 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) finally broke out in a big way on 4-27, leaving the former resistance area of 610 as support. 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 Investor's 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.
To subscribe to Joe Duarte's Market IQ Report Click Here.