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Oil Market update

by Clive Maund
www.clivemaund.com
August 14th, 2006

Upside momentum in oil and oil stocks had been slowing, and there are some who would argue that this is the reason for the timing of the shutdown of the Alaska Oil Pipeline by BP just over a week ago.

On the 5-year chart for Light Crude we can see that the long-term uptrend in oil remains intact. After the September 03 low the rate of advance accelerated and the trend channel became steeper, but generally, since early 2004 all reactions within the uptrend, whichever channel lines you use, have been back to the vicinity of the 200-day moving average - in other words this has been a classic bull market. However, oil has been "dragging its feet" lately, not managing to rise much above the steeper uptrend channel that started in 2004, and this action is increasing the risk of a breakdown from this channel and a reaction back towards the lower original channel line, which would not in itself mean an end to the long-term bullmarket. The risk of such a breakdown is not considered to be great, but it is nevertheless worth keeping in mind. Overall it would be foolish to lose sight of the fact that oil is still riding along above its steadily rising 200-day moving average, and while this remains the case the probability of further sizeable gains outweighs the risk of a significant decline.

On the 1-year chart for Light Crude we can observe that the uptrend from early in the year has been losing momentum, as signalled by the development of a Rising Wedge channel. This pattern increases the risk of a breakdown, although should it occur, the ensuing decline should not be that great as the upper long-term uptrend channel visible on the 5-year chart will come into play in the $70 area, where it is likely to arrest the decline. In the last update we had observed a potential small Head-and-Shoulders top in crude, and expected it to drop back as a result, but this aborted and a weak rally occurred synchronizing with the attack on Lebanon.

In light of the above it is therefore interesting to observe that the OIX oil index is at a critical juncture. On the 5-year chart we can see that upside momentum in oil stocks has slowed over the past year, although this is not to say it won't pick up again. The index is currently right at the top of an adjusted trend channel that is less steep than in the past. A very important point to note is that even if oil stocks back off from here near-term, there is plenty of underlying support from bullishly aligned moving averages and the confluence of two important long-term trendlines, so any near-term decline would be regarded as a buying opportunity, with stops at a suitable distance beneath the trend channels, of course.

On the 1-year chart for the OIX oil index we can see how it has been trying, but so far without success, to break above major resistance at the upper boundary of the adjusted long-term uptrend channel. The restraining power of an important channel resistance line is not to be underestimated, and even the Lebanon episode did not result in a breakout above this line, although we can be quite sure that an attack on Iran would suffice. It does look set to react from here, although as mentioned above in connection with the 5-year chart, a reaction is not expected to be severe, and probably would not return to the lower channel line.

With the OIX index close to an upper channel line, it will come as no surprise that many large oil stocks are either at important resistance levels or close to upper trendline resistance.

Clive Maund

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

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