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Oil Top Sets up Next (Last?) Market Leg Up

As of this morning, our expectations of $57 a barrel have been met - and exceeded. This has very significant consequences for how the markets will behave in the near future. We have considered numerous theoretical possibilities; The following scenario is in, our opinion, the highest probability:

Oil makes an intermediate top in the $57 to 59 area. The pullback from this level allows markets to rally.

When oil once again finds its footing - (our guesstimate is $48-51) and heads higher again, that sets up a double top in the major indices.

It is possible (though far from definitive) that this could even mark the high point for equities in 2005. Regardless, as Oil rallies back towards its prior highs, stocks run out of energy, and start heading back towards August 2004 levels.

We find it ironic that oil doubters -- the ones who were so harshly negative when Crude was between $40 and $45 -- have suddenly found religon. We recall hearing about the $20 "terror premium," the $15 bumb that speculators were causing. We wereb even warned that the Chinese economy was slowing (that implied lower oil also).

Indeed, we had heard every "excuse" for the price of oil - except for the one that mattered: A gradually improving global economy, one that was concentrated in Asia but particularly in China and India. We would be remiss if we failed to note that over half of the vehicles in our neighborhood are gas-guzzling SUVs. To be fair, we must acknowledge our own tendencies towards high HP vehicles and inefficient driving styles; At least we are inclined towards the more fuel-efficient manual transmissions (6 speeds preferably).

As oil passed $50 on the way to $55, something intriguing occurred: The Oil Bears became rip roaring Bulls. We now enter what we academically refer to as “the stupid phase,” with calls for $100 crude and unsustainable gains in the energy sector.

Oil has become a crowded trade, with Speculators shifting to net long crude futures and options, as opposed to a more recent position of close to "net flat."

As someone who has been bullish on Oil since December 2003, we are comfortable stating our expectations of an intermediate oil top between $57 -59. We expect the market’s response to any pullback from those levels to be positive, but short lived.

As we have previously stated, use this opportunity to reduce margin and, where appropriate, marry puts to long positions.

Thursday, March 17, 2005 | 02:14 PM | Permalink | Comments (2) | TrackBack (0)
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Comments

Hey Barry. Great post. I'm sharing it with others.

You think we're seeing another short squeeze going into contract expiry? You know anything about the Asian chatter regarding China and their incompetent energy traders, ala China Aviation? Someone is getting squeezed hard going into tomorrow it would appear. We've seen this play out before.

I like your call on the relief rally followed by significant bearage in opposition to oil. $50/barrel is hear to stay and that does change things in the economy that ANWR can't even fix. What do you think on the crude pullback? 2 - 3 months into start of summer season? The petro company stocks certainly need some relief of their own. One last gasp to link to price of oil today. A disaster, terrorist or otherwise, would be terribe for the markets right now. But, luckily end of quarter window dressing is imminent to save the market. I think tomorrow will signal if there is a short-term bottom in place. All signs suggest it's plausible. There is money on the sidelines looking for a home to close out the calendar quarter. I've seen it come out for weeks now.

Posted by: jjr | Mar 17, 2005 7:23:50 PM