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Oil Market Update

Clive Maund
April 2, 2007

We have seen a dramatic development in the Oil market over the past few days, for oil has risen strongly, breaking out from the large Head-and-Shoulders bottom that we had delineated in the last update. The Oil market appears to be responding to the increasing threat of an attack on Iran, which has remained on our radar screens (no pun intended) for a long time and been discussed on several occasions. Rather curiously gold and silver have done little during the same period. The explanation for this difference would appear to lie in the enormous difference in scale between the Oil and Precious Metals markets - when the two are compared it is like the difference between a flea and an elephant. You can tread on a flea without even noticing (although it might notice), but you try pushing an elephant around. The Oil market is so vast that it takes huge amounts of money, or a dramatic change of sentiment to move it significantly, and it is therefore regarded as being largely beyond the scope of everyday manipulators. The same is not true of Precious Metals which are comparatively small and thinly traded. In a situation such as we are now in, therefore, the signal being given by the Oil market is regarded as much more trustworthy than that being given by the Precious Metals. The Oil market is taking the threat of an attack on Iran seriously, and what this probably means is that the Precious Metals are going to come round to Oil’s way of seeing things, rather than the other way round.

On the 1-year chart for Light Crude we can clearly see the Head-and-Shoulders Bottom, and how the price has broken out from it just over the past several days. In the last update we had thought that it would probably take more time for this to occur, in order to allow a Right Shoulder to form of more equal proportion to the Left Shoulder, but it appears that the attack on Iran is not going to be put on hold to allow this to happen. The breakout was preceded by a sharp advance so that we now have a short-term overbought condition. Hence, we should not be surprised to see consolidation over the next several trading days or even a minor reaction before the advance resumes. The minimum target implied by the Head-and-Shoulders formation is last year’s high towards $80, and if Iran is attacked it could of course spike to much higher levels. If the situation with Iran comes off the boil, the oil price may slump back into pattern and do more work to complete a more proportionate Right Shoulder before later breaking out anew, which kind of implies that an attack on Iran is inevitable.

When Oil plunged early in January, the drop in oil stocks was surprisingly muted - as we can see on the 2-year chart for the OIX oil index it didn’t even break down from its uptrend, a resilience arising from the fact that fat profits were still coming through the pipe for oil companies from last year’s high oil prices, coupled with the backdrop of a still rising stock market. In the event that the attack on Iran goes ahead, oil stocks will subject to two major conflicting forces - one will be the bullish effect of a dramatic spike in oil prices and the other will be the bearish effect of the broad stockmarket and the dollar probably going into a tailspin. In this situation the bullish effect of the spike in oil prices will be expected to prevail by a wide margin, and thus oil stocks are likely to soar. We will be looking at some appropriate oil stock Call options on the site shortly.

Clive Maund
support@clivemaund.com
April 2, 2007

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and lives in Copiapo, Chile.

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