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2006-08-15 :: Entry #2 – Oil Technical Analysis

Here is a great article/analysis that I’ve cut/paste from RealMoney.  I thought you might like to see someone other than myself who believes that we are in a long-term bull market for Energy.  This article is long on technical analysis, which I’ve written in the past is a good partner to but not a substitute for fundamental analysis.   As the article progresses, there is some very logical fundamental analysis included that sounds an awful lot like stuff I’ve written here in past entries.  Hope you find this interesting….Mark

Trend Is Still Crude’s Friend
By Jim Wyckoff contributor
8/15/2006 8:16 AM EDT


Image Veteran traders know “smart money” follows market trends. Indeed, the market adage “the trend is your friend” has made many a trader wealthier over the years. In the crude oil market, the trend has been for fundamental events — both expected and unexpected — to support rising prices over the past seven years.

The latest unexpected fundamental event to support the crude oil market is the partial shutdown of a major BP (BP) oil pipeline in Alaska. While it has been reported that a total shutdown of the line is now unlikely, a partial shutdown will reduce output by about 50% — or around 200,000 barrels per day. Just before that, it was a marked escalation in fighting between Israel and Hezbollah. Before that it was Iran and its nuclear ambitions. Last year it was Hurricane Katrina.

Crude oil futures prices at the New York Mercantile Exchange are in a steady climb from the December 1998 low of $10.35 a barrel. Last month, the nearby NYMEX crude oil futures contract hit an all-time high of $78.40 a barrel. Deferred crude oil futures contracts have hit levels above that mark.

The monthly chart for NYMEX crude oil futures shows a steep price uptrend from the 1998 low is still firmly in place. There are no technical clues to suggest the steep and strong uptrend in crude oil prices will end anytime soon. Remember that the trend is your friend in trading markets.

To underscore the strength of the uptrend in crude oil futures prices, the Directional Movement Index (DMI) technical indicator overlaid on the monthly crude oil chart shows a present ADX line reading of 33.83. (The ADX line is a technical indicator that measures strength of directional movement of a market or stock. Any ADX line reading above 30.00 suggests a strong price trend is in place.)

Source: Jim Wyckoff

An important aside is the fact that the Continuous Commodity Index (CCI) recently hit a fresh 25-plus-year high, which also bolsters the notion that it’s unlikely crude oil futures prices will fall back significantly any time soon. The CCI is a basket of raw commodities prices rolled into one composite price index. The index is watched very closely by traders in all markets and is an excellent gauge of overall raw-commodity price inflation in world economies. In other words, raw-commodity price inflation is at a level not seen in over 25 years — led by the rise in crude oil prices.

With strong economic growth in China, India and other industrialized countries, it’s not likely that demand for raw commodities, including crude oil, will subside. Raw-commodities market bulls are presently basking in a worldwide tightening of supply-and-demand ratios for many raw commodities. In crude oil, from a geopolitical perspective, many industry veterans argue that there is anywhere from a $10.00- to $30.00-a-barrel “risk premium” built into the futures market at present. This means added value has been put into crude oil prices because of geopolitical uncertainty — be it Middle East, African or Venezuelan tensions, or the general threat of terrorist acts against energy infrastructure facilities around the globe. Don’t look for this added-risk premium to abate any time soon.

Interestingly, crude oil bears can correctly ascertain that any large terrorist attack against a major world economy could produce an immediate drop in crude oil prices. Reason: The possible sharp reduction in demand for jet fuel, gasoline and other energy due to consumers suddenly tightening their belts and staying home, for at least a short period of time, following any such terrorist act or threat thereof. Such was the case last Thursday, when oil prices fell amid revelations U.K. authorities had foiled a terrorist plot aimed at U.S.-bound airplanes.

Bottom Line: Bulls will continue to enjoy the solid advantage in the liquid energy futures markets. While corrective setbacks in prices, such as early this week, are a normal market occurrence, look for the nearby crude oil price — which at present is the September futures contract for the NYMEX — to trade in a range at higher levels — bound by overhead technical resistance at the contract high of $76.52 and by solid downside technical support at $70.00 a barrel. However, any escalation in the present Middle East crisis, or a terrorist attack on a major oil installation — such as has been attempted in Saudi Arabia — will most certainly spike crude oil futures above the $80.00-a-barrel price level — and possibly even close to $100 a barrel for at least a short period of time.