Oil… Is the Top Finally In?
Several weeks ago, I made the call that oil would not surpass $125.00/barrel prior to a pull back to near $100.00/barrel. Needless to say, I was wrong as oil hit an all time high of $135.09 yesterday prior to pulling back. This raging bull market and the ripple effect it is having on the US economy is eye opening to say the least.
Every industry, from the obvious transportation sector to the not so obvious is feeling the heat from the surging prices. However, I do believe we are finally very near a top in oil.
Let me explain why, Bloomberg reported earlier that the last price spike to $135.09 was clearly due to a short squeeze.
What is a short squeeze?
It is when there are a large number of shorts in the market who all move to buy them back at the same time, forcing prices upwards. Open interest has been shrinking since March in oil contracts. It has fallen 8.1 % to 1.36 million in just a week according to NYMEX figures. This drop corresponds to a 2.6% price gain over the same period, clearly supporting the short squeeze theory.
Bloomberg quoted Stephen Schork, of the Villanova, PA based Schork Group as saying “In a market like today, which is trending higher while open interest is falling, it’s a sign that money is moving out of the market.”
Facts are that the interest on NYMEX crude oil futures peaked on March 13th at 1.5 million barrels. A record number of small speculators, per the CFTC, were short, betting on a fast drop during the week of May 6th.
Well, at the very least, it’s comforting to know that I was not alone with my short call earlier! During congressional hearings yesterday, called to address the spiraling upward prices, the president of Shell Oil, John Hofmeister, stated that oil should be between $35.00 and $90.00 a barrel and urged Congress to permit exploration for domestic sources of oil. I stand by my contention that it is a speculative frenzy driving prices at these levels, and not true supply/demand dynamics. We may be due for a pull back.
Let’s take a look at the daily technical picture right now in oil. As you know, there has been a strong uptrend since February 10th when price was at $86.24. Price has been nicely above the 50 day moving average dropping back to test the 50 day SMA on 3 occasions since the February 10th low. I can easily see another test of the 50 day SMA starting now. The 50 SMA is presently 114.29 and a dip to this level is definitely in the cards in my opinion. My technical studies indicate that 137.23 should be massive resistance, and I will maintain the short bias unless 137.23 is breached.
A good way to trade your opinion on oil is via the NYMEX E-mini contract QM. It tracks price very closely and is totally accessible to most traders.
Good Luck!
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.