Technical Speculator: The Changing Path of Oil(ZT)

Wed, January 17, 2007
By Donald Dony, The Technical Speculator

Oil has made some tremendous moves over the past six months; more in percentage than any other natural resource. The worlds most highly traded commodity has sailed up to almost $80 in July 2006 and then plunged to nearly $50 by January 2007, wiping-out close to 38% of it value. What is causing these large fluctuations and is oil near a bottom now?

The exceptionally warm fall and winter weather across North America has been the main driver for lower prices in crude oil and natural gas. In December to mid-January alone, the West Texas Intermediate (WTI) spot price fell from $63.48 per barrel to $51.05, and the Henry Hub natural gas spot price dropped from $8.67 per thousand cubic feet to $5.67. Projections for the 2006-07 winter season, even with the current winter storms, point to a lower U.S. and Canadian home expenditure amount then in the 2005-06 winter. This would be the first winter since the winter of 2001-02 in which home heating fuel expenditures are expected to decline from the prior winter.

Global oil demand, however, still remains strong and is on course to rise by 1.5 million barrels per day in 2007, an increase of 0.7 million barrels per day above the 2006 growth. Most of the increased expansion reflects demand recovery in the United States. China and India now accounts for over one-third of this projected escalation in world oil demand.

Technically, oil has been trading in $7 - $10 bands for the past three years (Chart 1). Since July 2006 when oil was near $80, this commodity has broken through three price bands. This last price zone, $57 - $69, held oils decent for four months. Now with the move down through $57, oil has entered the next lower band which is $49 - $57. Will this new range contain oils rapid decline? The likelihood is yes and for several reasons.

From a demand standpoint, as Asias thirst for energy is continuing to expand in 2007, along with a rapidly recovering U.S. economy, demand will once again heat-up by the second quarter. From a supply view, OPEC has already stated that a meeting in the 1st quarter is planned to lower production and stabilize prices. These two factors should bind oil within the new $49 - $57 price range for a few months.

Another key piece of evidence to the expected recovery of oil is the commoditys leading indicators; the energy stock sectors. Both the Amex Oil Index and The S&P/TSX Energy Index are bottoming in mid-January. The Amex Oil Index (Chart 2) has moved down to the 1100 support level where increasing buying has returned. The TSX Energy Index (Chart 3), like the Amex Oil Index, has found solid footing on stable support. The 300 line, which held the Index during the drop in September 2006, has also sustained the recent retracement in late 2006. Both energy indexes are now positioned to trend higher for the next 4-6 weeks (see the main trading cycles in the lower portions of Charts 2-3).

MY CONCLUSIONS: After falling for almost six month, oil should stabilize and trade within its new price band of $49 - $57 until mid-2007. Look for a test of the lower range, near $49, in the last half of January. As the commodity slowly recovers, the old support level of $57 will now provide stiff overhead resistance and box oil's growth.

More information on commodities can be found in the January newsletter.

Your comments are always welcomed.

Donald W. Dony, FCSI, MFTA