Oil – readying for a move
Posted on 13 October 2009
With the decisive breaks in the long end of the US treasury curve and gold, we are getting the first substantive price action signalling a change in trends for markets. Equities are running on a short fuse. But what about oil – it too looks like it is readying for a bigger move – question is which way?
Following is a chart of WTI – can see the contraction in bollinger bands that typically presages a break out. A little over a week ago, I suggested this was rolling over. Now I am not so sure.
WTI could break either way. Taking out the recent high just under $74 would suggest a target of around $100 (6.18% retracement). A break lower would see a move to $50ish pretty comfortably. Think I’m favouring a break higher – would fit with the bullish move in gold and breakdown in Treasuries – signalling fears of inflation, competition for increasingly scarce real money, currency volatility etc.
Following are the charts of DIG (leveraged oil and gas long ETF) and USO (oil and gas ETF). On the face of it, the price action of both looks bullish – the leveraged ETF has already broken higher while USO is pushing against the ceiling.
Finally, some Australian stocks that I have had romances with over the years:
Both AWE and BPT are looking particularly healthy – having recently tested lower. (I have not been following them as closely as the past – but both have strong balance sheets and growth prospects – AWE from drilling, BPT from unconventional gas reserves – hence why they reside on the watchlist.) WPL is a little more difficult. When it was in the clouds back in 08, my analysis had $55 being an optimistic fair value as it required exceptional compound growth rates with continuing elevated oil prices. However, the green light on Gorgon has changed the ground rules here – so need to revisit the numbers.
4 responses to Oil – readying for a move
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see the contraction in bollinger bands that typically presages a break out
Do you see the obviousness in that commonly repeated statement? I ask in hopefully the nicest way and totally assuming you do. If bollinger bands contract it means the trading range has narrowed into a tight band. As tight trading ranges almost never persist of course a breakout will occur.
I’d guess option prices for a straddle would currently be expensive reflecting the high likelihood of this move.
Due to the fall in USD oil has actually been falling in most currencies up to a week ago, so for 75% of consumption the price has been going down. FWIW.
There were those massive floating inventories that need to be worked through before the price of oil can rise. Any idea what level they’re now at?
If you’re gloomy about the economy how can you think oil will rise?
My guess is the market is forward looking and sees better days ahead so the price of oil will rise once those floating inventories are used up, if they are not already. Yes the world will have to pay for the debt binge, but like an alcoholic waking up and having a drink we can put off our day of reckoning for another year or two by sucking straight from the government teat.
All the best
see the contraction in bollinger bands that typically presages a break out
Do you see the obviousness in that commonly repeated statement? I ask in hopefully the nicest way and totally assuming you do. If bollinger bands contract it means the trading range has narrowed into a tight band. As tight trading ranges almost never persist of course a breakout will occur.
I’d guess option prices for a straddle would currently be expensive reflecting the high likelihood of this move.
Due to the fall in USD oil has actually been falling in most currencies up to a week ago, so for 75% of consumption the price has been going down. FWIW.
There were those massive floating inventories that need to be worked through before the price of oil can rise. Any idea what level they’re now at?
If you’re gloomy about the economy how can you think oil will rise?
My guess is the market is forward looking and sees better days ahead so the price of oil will rise once those floating inventories are used up, if they are not already. Yes the world will have to pay for the debt binge, but like an alcoholic waking up and having a drink we can put off our day of reckoning for another year or two by sucking straight from the government teat.
All the best
Ei-op Dean,
Of course you are right about bollinger bands – I find them useful only because they highlight the contraction in the trading range – it’s a visual cue, but that could be said of all charting techniques. I haven’t checked whether implied volatility is (relatively) expensive. It isn’t necessarily the case – as the fall in historical volatility can tend to tug at market rates. Depends on whether the market is of the same view that a move is imminent (and is therefore bidding up vol).
On a fundamental view, I see oil going lower. The reason I’m beginning to question that view is due to the moves in gold and treasuries. These may not be signalling a rise in real demand but rather the flow of speculative money. It may be a rising fear of inflation is taking hold – due to the money printing rather than a demand driven episode. As yet I’m not positioned either which way – just watching it a little more closely.
Ei-op Dean,
Of course you are right about bollinger bands – I find them useful only because they highlight the contraction in the trading range – it’s a visual cue, but that could be said of all charting techniques. I haven’t checked whether implied volatility is (relatively) expensive. It isn’t necessarily the case – as the fall in historical volatility can tend to tug at market rates. Depends on whether the market is of the same view that a move is imminent (and is therefore bidding up vol).
On a fundamental view, I see oil going lower. The reason I’m beginning to question that view is due to the moves in gold and treasuries. These may not be signalling a rise in real demand but rather the flow of speculative money. It may be a rising fear of inflation is taking hold – due to the money printing rather than a demand driven episode. As yet I’m not positioned either which way – just watching it a little more closely.