Oil Markets: $50 Oil Means It's Crazy Time
Crude oil futures were trading above $50 per barrel on 9-28, in very early pre New York action.
Soon, we expect to see traders being interviewed on local news channels, and predictions of $100 per barrel oil featured on local newspapers. If and when it happens, we'll know that the top has to be near. Until then, it is a momentum market, the most profitable type of all markets, as long as those involved can get out in time.
Already, signs of "irrational exuberance" are appearing.
The Drudge report updated the price of oil as it went above $50 in the overnight session. The revolving light icon flashed on occasion, fanning the drama. On the left hand corner of the page was a link to CNN, with the headline "Nothing OPEC Can Do."
And according to Reuters: "OPEC is powerless to stop the rise in oil prices at the moment although it has about 1.5 million barrels per day (bpd) of spare capacity to add to supplies, president Purnomo Yusgiantoro said on Tuesday. As U.S. crude rose to a record $50.17 a barrel on Tuesday, Purnomo said he had not yet had any contact with OPEC's 10 other members. ["At the moment there's nothing we can do. OPEC has spare capacity, however, whatever we do there is no sensitivity in the market."]
These are all signs that something very dramatic is about to happen, either a major momentum run up of several dollars in crude prices, or we are near the top. Drudge is not known for its serious financial journalism. And OPEC throwing up its hands is about as bizarre a scene as we have ever seen.
The most recent bubble that we all witnessed was in 1999, as the Internet stocks went ballistic, starting in the fall of 1999, and finally crashing in the spring of 2000. If this is the same kind of situation, we could be in for a major move up, and the eventual let down.
Much of what happens depends on the supply data to be released on Wednesday.
Meanwhile, a regular New York close above $50 will grab the headlines and increase calls for the White House to open up the strategic oil reserves. At a time when the election nears, it would not surprise us to see it happen, if the data shows enough of a decrease in the latest supply figures.
Oil stocks made significant break outs last week, suggesting that the big money is ready to take prices higher.
For now, we remain positive on the sector, noting that this is a time for traders to be very disciplined. But, we note this. When the oil market cracks, it will be a major break. And the repercussions for the rest of the markets will be significant.
The Philadelphia Oil Service Index (OSX) closed near 120, holding above its break out point. 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) remained above its recent break out point. This is uncharted water for the oil stocks. A pull back of some significance would not be out of the question here, given the size of the one day move on 9-21. 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.
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