Oil:100 isn't easy

GUEST COLUMN

This is the fourth 'high' piece we have written in recent times. We had gold hitting a high, coffee on a high, rupee making highs, and now oil. There were other highs as well such as the Dow and the Sensex. 'Highs' are very important prices as they help measure exuberance and 'lows' help measure panic.

The recent high in oil, which is hovering near $90 and touched the psychological figure on futures, is another exuberance that needs measurement. How extreme is mass psychology here? Has it reached an extreme here? Is it going to $100 now or is there time before it crosses our long term target at $100?

Just like our oil coverage last time, the above questions are important sentiment questions which have nothing to do with geopolitical risk, demand-supply gaps and all that noise.

This is what we said in our last column in The Smart Investor on April 9 -- "Oil has clearly moved above its key 50-day moving average, and the outlook is bullish. The top news now is that crude oil may fall next week after Iran's release of 15 British naval personnel eased concern that shipments from the Persian Gulf will be disrupted; 48 per cent of oil analysts said oil prices will decline. This is too high a number of oil bears and keeps us contrarian and bullish on oil. Current prices have made a clear attempt to move above the rolling average. And it seems that apart from all the news, a support here above the average might be all that we need to take oil from $60 to $100."

Now that news and events got trashed again, we can review the time ahead on oil. When everybody thinks $100 is easy, it ain't easy.

Oil Service Index (OSX) has bearish candle formations on both monthly and weekly time frames and resistance levels at $300, the S&P Energy index is below its previous high with resistances at $80, BSE Oil index has a key reversal bar and one year primary degree resistance at 11,000, and Exxon at $94 is just short of 20-year log channel resistances at $100, MCX oil is also below its August 2006 high at Rs 3,500, The exchange traded fund XLE has a bearish engulfing bearish candle formation on weekly time frames at $78. And all these sector peers seem to stand against Brent and WTI, which have gapped up to near $90 levels.

Above this, we have the Commodity Research Bureau index, which points downs and intermarket cyclicality between Dow and oil is also at a 15-year high. Oil did not outperform the Dow from October 1991 till August 2006. And current intermarket cyclicality suggests that oil might underperform the Dow.

This means even if markets fall, oil might fall faster. Now this does seem strange considering analysts are already talking about $100. Well, we were speaking about $100 at $60 not at $90. Now at $90, we are saying let the sector components break their respective resistances. If they do it's not going to be $100 but $125. But till then we are looking down back to $80 and maybe lower -- 100 ain't easy.

Contributed by Orpheus Capitals