It's Still a Bear & The Oil Bubble

[On the Road]

from Carl Swenlin's technical site "Decisionpoint", one of the best free sources on the internet. Note that this was written on June 20:

It's Still a Bear & The Oil Bubble
by Carl Swenlin
June 20, 2008

---snip

While fundamentals play an important role in futures prices, human emotions are also a big part of the mix. Occasionally, like now, irrationality rules the day and a price bubble forms. The easiest way to tell that a bubble exists is to check the monthly-based chart for a parabolic formation. This is were prices move higher in an accelerating curve that eventually becomes vertical. On the chart below, you can see that this is the case with crude oil. This is a sure sign that prices are no longer connected to reality.

You will notice that just eighteen months ago oil was at $50/bbl. Now it is nearly three times that price. Have fundamentals changed so radically during that time? Of course not. The same kind of irrationally is at work in the oil market as we currently have in the housing bubble, and as we had in stocks in 2000.



---snip

I can't guess how high oil prices will go, but eventually there will be a catalyst of some sort, and prices will fall almost vertically, quickly bringing oil prices back in to the realm of reality. The most obvious catalyst would be if congress lifted the ban on domestic drilling. While that doesn't sound likely now, the rising price of gasoline may eventually turn the screws enough to change some minds.

* * *

As for the stock market, the bear market clearly remains in effect. Our long-term sell signal has never wavered during the recent rally, but there were certainly plenty of positive signs (see my June 6 article) that suggested the bulls were about to take charge. One of the strongest signs was the price breakout above the declining tops line drawn from the bull market top. Obviously, this was a fakeout because prices failed to remain above support and are now headed for a retest of the March lows. Fakeout breakouts are common in bear markets -- I have identified two that occurred in 2001-2002.



Bottom Line: Current high oil prices cannot and will not be sustained. Bubbles eventually burst, destroying all the foolish logic that said that prices would never go down again. I personally believe that, if congress lifts the drilling ban, oil prices will drop by about 50% within a few months of that action.

---snip

http://www.decisionpoint.com/ChartSpotliteFiles/080620_oil.html

If the base before the spike in oil prices was at about $50, Fibonacci numbers suggest that the retracement will bottom at either $112, $100, or $87. This will either mean a stock market rally or a break between the recent negative correlation between oil futures and stocks.

[lostnotforgotten]

1. No Understanding Of The Fundamentals Of Peak Oil

It assumes an infinite supply of oil ad infinitum.

[On the Road]

3. He is Discussing Market Forces

I guess we will find out who's correct.

[Warpy]

2. There is no ban on domestic drilling, for one thing

Millions of acres have been leased out but are not being drilled for the sole reason that drilling equipment is booked for the next five years.

There is also no shortage of oil, worldwide. There is, however, a slight increase in conservation due to high prices that has tankers sitting at anchor offshore and in the Persian Gulf, waiting for places to offload.

What will cause the bubble to pop will be removing its cause, the threat of another war in the Middle East.

Spot market futures will stay high until and unless that happens.