Crude Oil Price Chart: 6.5% Overbought

Crude's recent rally since 10/8 has pushed the commodity to a new high, but more notably the change was so rapid that it is now 6.5% overbought (at its peak today it was more than 7% overbought).  (Or 6.5% above the upper boundary of its trading envelope.)  In fact, at its current level of $87.40 per barrel, crude is two standard deviations above its 50-day moving average.  We looked back at similar spikes this year, where crude was two standard deviations above its moving average and also at least 5% overbought.  In 66% of the cases (highlighted in red on the chart) crude traded down over the following week for an average decline of 1.79%. 

Comments

[Aaron]

It seems like oil has been overbought for a while now, but it just keeps getting more extended. I guess this just goes to show how much political unrest can cause crude to rise.

[Cleve]

Aaron, thanks for mentioning this important point. I think crude, much more than stock prices, is influenced heavily by factors outside the financial markets. Another interesting thing about crude is that one commodity carries so much weight. Politcal unrest might cause IBM or GE's stock to move, but that would not impact other stocks so much. International issues can cause 5% changes in the price of oil and that change will in turn be blamed for 100 point loss in the Dow.

Historically, however, over the next week crude usually returns to its trading range.

[Stacey Laliberte]

I was looking at the official energy statistics from the U.S. government show that in 1995 worldwide oil demand was 70 million barrels/day, by the end of first quarter 2007 demand had grown to 85.4 million barrels/day. This represents an increase in demand of 22%. Even though demand was 85.4 million, supply fell short, coming in at 84.1 million barrels/day. Clearly an increase in supply capacity is needed.

In the past OPEC has met extra demand with extra supply, just open up the tap a little more. There is currently only 2 million barrels per day of spare production capacity, not a lot of wiggle room.

Short term I think we'll see a retrace but long term I think high prices are here to stay

[gy zhao]

Today is October 25, the oil price reaches 90.80 in the evening. There was an analysis of Adam Hamilton in Zeal Speculation and Investment on October 19, http://www.zealllc.com/2007/oilbull.htm. He defined a “Relative Oil”. It just expresses the oil price as measured by its 200dma. For example, a value of 1.25 simply means that the oil price is trading at 1.25 times its 200dma. Curiously, over time the up-leg tops within a given bull tend to cluster around a certain multiple of their 200dma. In the case of oil, this is 1.26. While the 9 major up-legs prior to this one topped between 1.15 to 1.37 oil’s 200dma, thus, the average “Relative Oil” top ran 1.261. When he wrote his thesis, “Relative Oil” was 1.288. Today is one week after his writing and the oil price is still climbing. The so-called “Relative Oil” is about 1.34, it seems that it is catching the highest among the 9 up-legs. I believe Adam Hamilton’s analysis very much, because his analysis is based on the fact in stock market, but I am expecting this number will reach 1.40 before the retreat of the oil price. Thus oil bulls should be careful for the coming consolidation. I expect it maybe a rough one.

[Mayank Tiwari]

Crude Oil has broken all records, as the highest traded contract in nymex made a new high in 92.22$, however crude strong resistance levels are at 92.48, 93.41 & 94.17 $ levels, crude chart is at its overbought levels, the only reason behind is middle east crisis which is holding the prices strongly up and even the massive inventory decline last wednesday also has resulted in heavy buying in the market, my view for crude is to sell around these levels & keep booking profits in intraday trades.

[Cleve]

Mayank, how do you calculate these "strong resistance levels?"

[gy zhao]

Recently Clive Maund gave an excellent analysis on oil behavior titled as “Oil Market Update” on 10/17/2007. His article shows that even though oil looks set reaction back soon within uptrend channel shown on the shorter-term chart, on long-term chart, there is no overhead resistance and upside is potentially unlimited. This is to say that with the money supply now being inflated aggressively worldwide, and especially in the US, the outlook generally is for continued and possibly accelerating inflation, which is expected to continue to fuel a broad-based bull market in commodities. Thus it is reasonable to expect oil, which is priced in US dollars, to continue to advance. It would clearly result in further huge gains. Depending on the inventory and geopolitical conditions, the excess greedy in this oil bull may accumulate much more than we can image. However, bull-market is always two steps up and one step down, thus sooner and later we will see an abrupt correction appear. The more excessive greedy the brutal will be the correction. Many people now send money to buy DUG ETF fund, and actually even when oil is up this fund has been almost at the same price. I think these are smart money.

[gy zhao]

As I mentioned in last comment, bull-market is always two steps up and one step down, thus sooner and later we will see an abrupt correction appear. The more excessive greedy the brutal will be the correction. Now it looks like the correction is coming. However, at the beginning it will not so brutal because bulls think this may be the volatility of the market, when the market is down for several days, the panic will be stimulated and the fear will be more. Then you may see a lot of sales at lower price and gradually the bottom will be reached. However, the correction usually be three steps, called a,b,c waves. When it is really bottomed we can go to do bargain hunting, at this moment we are shorting oil using DUG fund.