Crude Oil Prices: Major Top or Minor Correction?

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Over the past few weeks, crude oil prices have collapsed. Oil was trading as high as $93 a barrel on January 19, and as low as $86 on the 26th. This break of $7 a barrel (top to bottom) is nearly an 8% price correction, and this all came in just a week. If oil prices continue to fall at this rate oil prices would be cut in half by early March.

The odds of this happening to crude oi? I would say close to zero. 

Goldman Sachs (NYSE: GS) is predicting oil prices will rise to well over $100 this year, but then they were also predicting this a week ago (before the recent collapse). Let’s discuss the reasons for the recent break and what we can expect to see going forward.

The stated reasons for the break have to do with the removal of risk from the table. Recent GDP data out of the UK shows a declining economy due to austerity measures. Is this a leading indicator of declining global demand? Some traders think so. Additionally, Saudi Arabia has recently stepped up their production to generate more revenue in light of a declining dollar. However there is one overriding fundamental that, in my opinion, created the recent price break and it’s called “money.”

The speculative long position one week ago in oil futures reached a record high. Too many people listen to the folks at Goldman Sachs (and others) and loaded up to the hilt on their oil positions. The market has a way of cleansing extreme activity. A market, even one with good fundamentals, that goes up too far too fast, can also fall too far too fast.

So where can we anticipate the bottom? From a macro fundamental point of view oil prices are becoming cheap in relation to global demand (which has hardly budged). In the short run, however, markets can be volatile and tricky. An old rule of thumb, which has helped me, is the 10% rule. In a major bull market prices can fall up to 10% from any top and still remain in a major up-trend. On this most recent move 10% = approximately $84.

So crude oil prices could even fall to this level and remain in a major up-trend. As long as the futures price of the spot month remains above $84 I would consider the major trend as up. However as traders we do not try to pick bottoms in these corrections, rather wait for some price sign of a momentum turnaround to be a buyer.

Watch for this! And investors in crude oil stocks like Exxon Mobil (NYSE: XOM), up 8% YTD as of the opening bell, and Marathon Oil (NYSE: MRO), up +17% at the bell, should remember their market beating returns so far in 2011.

George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: gkleinman1@gmail.com. Phone 800-233-4445.

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CRUDE OIL PRICES; MAJOR TOP OR MERELY A CORRECTION?

Over the past few weeks, oil prices have collapsed. Oil was trading as high as $93/barrel on January 19th, and as low as $86 on the 26th. This break of $7/barrel (top to bottom) is nearly an 8% price correction….and this all came in just a week. If oil prices continue to fall at this rate oil prices would be cut in half by early March. The odds of this happening? I would say close to zero.

Goldman Sachs is predicting oil prices will rise to well over $100 this year, but then they were also predicting this a week ago (before the recent collapse). In this column let’s discuss the reasons for the recent break and what we can expect to see going forward.

The stated reasons for the break have to do with the removal of risk from the table. Recent GDP data out of the UK shows a declining economy due to austerity measures. Is this a leading indicator of declining global demand? Some traders think so. Additionally, Saudi Arabia has recently stepped up their production to generate more revenue in light of a declining dollar. However there is one overriding fundamental that, in my opinion, created the recent price break and it’s called ‘money’. The speculative long position one week ago in oil futures reached a record high. Too many people listen to the folks at Goldman Sachs (and others) and loaded up to the hilt on their oil positions. The market has a way of cleansing extreme activity. A market, even one with good fundamentals, that goes up too far too fast, can also fall too far too fast.

So where can we anticipate the bottom? From a macro fundamental point of view oil prices are becoming cheap in relation to global demand (which has hardly budged). In the short run, however, markets can be volatile and tricky. An old rule of thumb, which has helped me, is the 10% rule. In a major bull market prices can fall up to 10% from any top and still remain in a major up-trend. On this most recent move 10% = approximately $84. So prices could even fall to this level and remain in a major up-trend. As long as the futures price of the spot month remains above $84 I would consider the major trend as up. However as traders we do not try to pick bottoms in these corrections, rather wait for some price sign of a momentum turnaround to be a buyer. Watch for this!

George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: gkleinman1@gmail.com. Phone 800-233-4445


Article printed from InvestorPlace Media, https://investorplace.com/2011/01/crude-oil-prices-major-top-or-mere-correction/.

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