Technician Call: Oil to $90+, But Questions Seasonality (USO, GLD, OIL, OIH)

Now that Gold has busted $1,000.00 and headed up almost every day since, the next target commodity is oil and the question is if black gold can mirror the performance of yellow gold.  One of our affiliates has a quick detailed technical analysis audio/video presentation that shows the possibility of much higher oil prices.  The United States Oil (NYSE: USO) is harder to use as a measure to directly track oil tick for tick, because unlike the SPDR Gold Shares (NYSE: GLD) directly investing in gold bullion, as the USO tries to track oil prices by rolling futures contracts.  The iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) also uses crude oil futures contract (plus the T-Bill rate of interest that could be earned) to track oil prices.

While using the price of oil as a tracking measure is hard to do outside of directly trading oil, the Oil Services HOLDRs (NYSE: OIH) is one of the best way to play the big oil services companies and it often tracks broader oil prices more than the large integrated oil players.

Our affiliates over at INO.com are noting that the charts are calling for what may be significantly higher oil prices.  We might not care, but Adam Hewison was the one calling for significantly higher gold prices long before that $1,000 barrier was breached. The hedge is the seasonality factor that comes into play in most fourth quarters.  But a true technician looks solely at a chart to make determinations.  And if you look solely at the charts in the same manner as a true technician, then you have your call.

Interestingly, the $60 to $75 area in NYMEX WTI crude is $60 to $75, and the call in the presentation for much higher prices here is only if oil closes above $75.00 for a few days.  But using the Fibonacci retracement levels, a 38.2% retracement takes oil to $$83.97.  A 50% retracement takes oil closer to $95.00 per barrel.

What is interesting here is that for oil to go that much higher, it is effectively a disaster for the economy.  At some point, higher oil prices would likely decouple from the move of higher stock prices.  The same market fundamentals are not present that were in effect in mid-2008.  Much higher oil prices will also act as a tax against the army of unemployed and underemployed.  We have almost 1 in 10 able workers at home sitting on the couch, and we have another 6 or 7 per 100 workers that are underemployed, working part-time, or are taking smaller contracts to get by but have no future prospects for a great job.

Our issue is perhaps the same problem that Adam Hewison has, there is an exception to the chart.  Adam’s take is that the seasonality should be pushing down prices.  Our take is far more cynical in that oil should have never gone as high as it did in 2008.  The market fundamentals never changed as oil rose.  The demand increases were marginal.  Yet the $80 to $100 happened.  Then the $100 to $120 happened.  And then the $120 to $140+ happened.  There was never more incremental demand that ate up supply to account for that run up north of $100 that much even if China wanted it all.  It was infinitely more capital chasing an asset with a finite market.

The new CFTC guidelines are aimed to keep crude from getting ridiculous on a speculators game.  The Obama administration cannot control supply and demand in oil, but it is showing that it has no issue at all in regulating speculation when it comes to speculation causing price extremes.

Oil can go higher, but for it to run off the charts as soon as before the end of the year our take is that it would take a serious event involving Iran or something else on the geopolitical stage that actually disrupts significant supply.

Jon C. Ogg
October 14, 2009