Where Oil Prices Are Headed Now

I’m not sure about you, but the high gas prices are making me think hard about driving my gas guzzling SUV! The view high up is great, but I’m constantly going to the pumps and it hurts when I fill up and shell out the cash. And if you also own an SUV, I’m sure it has crossed your mind to trade in your gas- guzzler for a fuel-efficient ‘smart’ car. Hey, the view may not be as good, but it also won’t hurt you at the pumps. For example, the Mercedes smart car gets 60 miles to a gallon!

 The charts tell the story. The basis June Crude Oil on the New York Mercantile Exchange came within a whisker of breaking $60 a barrel on April 4 after trading at $59.32. Prior to this, the June contract surged to $58.70 on March 17 after trading at $41.01 back on December 28, 2004.

 But the failed technical breakout in March and April 2005 resulted in what’s known as a bearish double top on the charts. Since then the intermediate trend has reversed with the June contract. Sounds like cheaper gas is on the horizon.

 The intermediate oil price trend is bearish with successive highs failing to bounce back to previous highs and successive lows lower than previous lows. Thus, the downward “stair” pattern is clear.

Advertisement

 The long-term chart is bullish, but there has been and continues to be selling pressures. On December 1, 1998, the price of spot crude was trading at a mere $10.80 a barrel and SUVs were all the rage. In the six plus years since, crude prices have edged higher, but not without intermittent pullbacks.

 So, in spite of selling pressure, crude has managed to stay afloat and trend higher. The breakout at $40 was bullish and drove spot crude to above $50 by September 2004. The oil producers are happy. They can drive their massive Hummers with little regard for price.

 So, are oil prices heading lower now?

 The charts say, “yes,” unless we see some buying support resurface in the market. Spot crude just broke below its key 20- day moving average at $51.25 as well as its 50-day moving average at $52.96. Now hovering at around its longer-term 200-day moving average of $48.68, a strong move downwards could see crude lose steam and move towards the key $40 support level.

 The current selling pressure is driven by remarks from oil cartel OPEC that it is optimistic towards the supply side of the economic equation, saying prices would drift lower from the key $50 threshold. OPEC feels its current production, which is already near capacity, will provide ample supply throughout 2005. But, do you believe OPEC? Maybe it’s just softening the blow!

 Oil prices are prone to uncontrollable shocks such as terrorism. Moreover, China, a growing industrial giant and the world’s second largest burner of oil after the United States, has seen superlative economic growth. But, according to the Paris-based International Energy Agency, the demand for oil fell to 4.5% in the first quarter of 2005 versus a whopping 19.5% the comparative year. Is this an aberration, or is China’s massive industrial juggernaut destined for a fall? Only time will tell.

 SUV drivers shouldn’t get too excited. The crude market is oversold and could bounce back. But, keep in mind the current market sentiment and trend towards crude is bearish. Don’t bet against the trend!