Crude Oil Weekly
5th Wave Extension
© ELLIOTT today, November 6,2007
Chart: futuresource.com
Why So Bullish on Stocks, Oil & IOUs, All at the Same Time?
10/26/2007 4:00:06 PM
As optimism about financial markets reigns supreme, scientists from New York University announced this week that they have pinpointed two parts of the brain where our optimistic thoughts originate – the rostral anterior cingulate and the amygdale. Reuters reports that the researchers did special MRIs of the brains of 15 students as they asked them to imagine positive, neutral, and negative events, such as going to a birthday party or a funeral. The researchers also examined how the brain has a bias for optimism and determined that "humans expect positive events in the future even when there is no evidence to support such expectations." This research may go a long way toward explaining the overwhelming amount of optimism that holds up the financial markets now. Bob Prechter gives his perspective on the situation in this excerpt from his October Elliott Wave Theorist.
* * * * *
Excerpted from The Elliott Wave Theorist by Robert Prechter, October 2007
Why Are Investors Bullish on Stocks, Oil and IOUs, All at the Same Time?
Explain this: The last time there was this much optimism toward oil was 1973-1974, and the stock market was falling. This time, the stock market has been rising right along with oil, and the optimism toward stocks is also extreme, by some measures the most extreme ever.
Obviously, this is not the 1970s when a rise in oil coincided with a collapse in stocks. But we said all along that this would not be like the 1970s. Conquer the Crash was the first publication (that we know of) to observe that the financial markets had begun trending together along with the ebb and flow of liquidity. So stocks and oil are rising because of the liquidity in the form of credit that has flooded the markets over the past half decade. Advocates of perpetual inflation say that this expansion will continue because the Fed can inflate at will. If that were true, then one would have to explain why the credit market is so stupid that it requires only 4 percent interest from T-bills, which are dollar-based IOUs. Inflation is raging, so shouldn’t the yield on IOUs be 10, 15 or 18 percent, as in the 1970s?
Only one explanation takes all these events into account: Optimism is at an all-time extreme in extent and duration. That optimism has fueled the largest expansion in credit in history. Investors have used this credit to buy every investment. Optimism keeps lenders lending and borrowers borrowing, and it keeps investors buying stocks and borrowing to finance speculation in commodities. Until recently it kept them buying mortgages on leverage, too.
Optimism also keeps interest rates low, because optimistic creditors are not afraid of default. The recent collapse in the value of sub-prime mortgages and the jump in banks’ overnight lending rate were the first hints that optimism is faltering. When it reverses fully toward pessimism, interest rates on all risky debts will soar, in many cases to infinity. But rates on secure debt will fall, probably close to zero, because investors will want safety above all else.
[Source: Elliott Wave International, click below]
The Rude Awakening
Laguna Beach, California
Friday, January 19, 2007
Oil Plays Dead
By Eric Fry
What does the recent slide in crude oil imply for its long-term outlook? Is oil going to $100 a barrel or $30 a barrel…or both? If both, where’s it going first? We wanted to know. So we asked a few guys who might be able to formulate better guesses than our own. Their responses are as follows:
Jay Shartsis, a professional options trader with R.F. Lafferty in New York City, relates:
“Well, there’s two things I’d mention, both of which suggest we’re drawing close to a bottom in crude. First, oil stocks are holding up very well, even though oil itself is still tanking. With oil getting clocked again I think it worth noting that the XOI Index is well above the lows it hit last week. This resistance against the sharp crude drop is probably telling us that a bottom is at hand for the energy complex.
“Meanwhile, the Dow Transports aren’t acting all that great. The transport stocks usually rally when oil is falling, for obvious reasons. This time has been no different. In response to the oil collapse of the last few months, the transports have been on a tear. However, even with the big run of the past few weeks, the Transportation Average still displays a series of declining tops which began last May. The last top of 4891 was hit on November 17th, 2006 and today’s high is only 4877.69. In other words, even though crude keeps dropping, the transports can’t seem to gain any new ground. This is a negative divergence that suggests crude might soon head higher.”
Kevin Kerr, the mind behind the Resource Trader Alert, relates:
“Well, as the snow falls outside my window, I can hear the heating oil draining out of my boiler. I expect that as we head into the next three weeks we will rapidly see big drawdowns in supply, which should prevent the price form falling too much further.
“But for the moment, panicky sellers are setting the tone. We're seeing the exact opposite phenomenon we encountered last summer, when speculators aggressively bid the price of crude higher. Today, we are seeing the same irrationality on the downside. No actual change in production, supply, or distribution is fueling this sell-off.
“But meanwhile, geo-political tensions are as high as ever, and the Gulf Coast is still very vulnerable to hurricane damage. A lack of viable alternatives will keep oil demand high and any sort of disaster could easily send the price up 30-40%.
“The bottom line is that as we get close to summer, likely in March when OPEC meets again, reality will sink in and the short-sellers in this market will begin to run for cover. This pendulum will definitely swing back the other way. By the year's end I fully expect this market will be making a new high - if not sooner.
“I am trying to find the best bargains right now on all the energy stocks that seemed sky-high last June. I am also be looking to buy August or September contracts on unleaded gasoline. [Editor’s Note: To learn more about Kevin’s commodity-trading service, The Resource Trader Alert, click here. ]
Byron King, a former geologist and current contributor to Whiskey and Gunpowder, relates:
“Eric, my view is that this is the ‘January Sale’ for oil investments. Best companies on the planet are selling at massive discounts. You can buy reserves in the ground, and the means to extract them, at dirt-cheap (excuse the pun) prices.
“Two companies that you always want to own in a rising oil market, but can never seem to afford because the big institutions bid them up, are Baker Hughes (BHI), drill bit maker, and Schlumberger (SLB), oil field services provider.
“In the past two months, both have tumbled sharply. They are relative bargains, and in any oil recovery will make up their recent losses like the space shuttle lifting off from the pad. Be patient, but watch for the spark of ignition.
“And will the price of oil & gas go back up? Ummm.... seen the weather map lately? And add to the mix that the Iranians seem desperate to pick a war with the US. One flaming tanker in the Straits of Hormuz, and watch oil go to $100/bbl and more. Time to short the airline index?
Steve Belmont, the Senior Market Strategist for the Rutsen Meier Belmont Group LLC in Chicago, relates:
“Eric, like you, I wonder whether this selloff in crude is a harbinger of more pain to come or a major buy opportunity. One could make good arguments for either.
“But long-term fundamentals suggest a buying opportunity at hand. Crude could dip as low as $45 without completely negating the longer term uptrend. The trader in me wants to buy either at $45 and/or following some confirmation that the bloodletting is over. As you may have suspected, we haven't seen that confirmation yet.
“The last time oil experienced a sell-off of this magnitude was in 2003, immediately following the invasion of Iraq. The “successful” US invasion was supposed to ensure plentiful oil and prices dutifully crashed 60% once the Iraqi army was defeated. The current bull market began nine weeks later. 2003 was also the last time the US had two carrier groups stationed in the Persian Gulf. With another carrier group steaming toward the Gulf now, the potential for a widening of the Iraq War grows. All it would take is one Chinese-made, Iranian missile striking one American ship.
“The near-term outlook for crude oil looks bleak. However, long time traders know it is generally darkest just before the dawn. When oil prices finally turn up again, they could do so in a hurry. Like it or not, the world is still running out of cheap oil. Triple-digit crude is still in the cards.”
Justice Litle, editor of Outstanding Investments, relates:
“I like Pickens’ take. The legendary ‘oil man,’ T. Boone Pickens, says he’s ‘not going to back off’ of an earlier prediction that oil would average $70 a barrel in 2007.
“Looking out longer term – and in light of all the recent bearishness – it is worthwhile to ponder the Energy Information Administration’s recently released ‘Annual Energy Outlook 2007 (Early Release version). Here are the two most interesting sentences out of the whole thing (in your humble editor’s opinion):
“‘Oil, coal and natural gas… are projected to provide roughly the same 86% share of the total U.S. primary energy supply in 2030 that they did in 2005 (assuming no changes in existing laws and regulations…In 2030, the average real price of crude oil is projected to be above $59 per barrel in 2005 dollars, or about $95 per barrel in nominal dollars.’
“Trying to predict anything 23 years out is a foolhardy exercise… but the EIA projections are nonetheless instructive.
“For one thing, the projections show just how small the alternative energy base still is in comparison with fossil fuels. It is not that the EIA expects zero growth in alternative energy’s slice of the pie over the next few decades; rather, the EIA expects total energy demand to overwhelm all else, with fossil fuels filling the breach. (For this same reason, the EIA expects nuclear power’s share of the pie to actually fall in percentage terms, even as more nuclear power plants go online.)
“The EIA’s second prediction is chuckle-inducing. For crude to be just above $59 in 2030 -- not far from where it is now -- means little will have changed on the whole. (And how helpful of the EIA to let us know that $59 in 2005 will translate to $95 in 2030). That’s a wonderfully benign inflation rate… just over 2% per annum between here and there.
“Such a prediction relies on heavily aggressive assumptions in regard to deep-water drilling and Canada’s oil sands. Such a prediction also requires an almost touching naivete in terms of U.S. monetary policy; can we really expect inflation to run just 2.1% per year for the next 23 years? (What happens when the dollar goes down in flames?)
“In the short run, a market can do most anything -- especially one dominated by speculators with a quarterly, or even monthly, time horizon. But in the long run, as Jesse Livermore noted, the best and truest allies will always be underlying conditions. You’ll see all kinds of numbers fly around in the coming weeks and months, feet stampeding this way and that…but through it all, the long-term energy picture won’t shift much. We’re dealing with sweeping sea change here, not ephemeral seasonal stuff.
“That’s why I’m not inclined to worry too much about this recent crude oil slide. There’s never any money in running around like a chicken with your head cut off. Traders rely on speed and reflex, investors on patience and fortitude; to the best of my knowledge, nervous panic is no help to either discipline. If anything, the short-term roller coaster gives an edge to those with a taste for the long-term view.”
Socionomics explains:
While knowledge of current events and extramarket conditions has almost no value in predicting the stock market, knowledge about the position of the market can help predict changes in outside conditions. The Wave Principle provides a basis for speculating upon upcoming changes in market trends and therefore the events that result from the social psychology that the trend changes represent.
(The Wave Principle of Human Social Behavior, 1999, Robert R.Prechter)
"The Big Oil Surprise."
The Wave Principle produces a form displayed by markets that may be summarized as follows.
When the larger trend is up, rising patterns, termed "impulse waves," are composed of five
subdivisions: up, down, up, down, up, in which the fourth wave (down) holds above the first and
one upward wave (usually wave three) is typically longer than the other two. Most advancing
waves unfold between parallel lines expcept for fifth waves which fairly often unfold between
converging lines. Each five wave pattern is a component of a larger one and is in turn composed
of smaller ones. Downward patterns (waves two and four), termed "corrective waves", are more
variable in form, and are composed of three waves or some variation thereof, each of which is
named with terms such as "zigzag", "flat," "triangle," and "double three." Waves two and four
typically "alternate" in that they take dfferent forms in a particular fashion. Relative sizes, or
degrees, of waves are named for easy reference with terms such as Intermediate, Primary,
Cycle and Supercycle.
Recently the headline of a WSJ article described the decline in Crude Oil prices as
"The Big Oil Surprise."
January 18, 2007
The Big Oil Surprise
It’s been a weird winter, with heating fuel not really needed for much of anything, but oil traders certainly weren’t expecting crude oil inventories to increase by 6.8 million barrels last week, the largest weekly gain in barrels since the week ended Oct. 11, 2002, the Energy Department said.
“There’s more supply on hand now than market can really deal with,” says xxxx, editor of the xxxx, a daily newsletter on oil and gas. And $50 a barrel, which the market waved goodbye to on the way up in May of 2005, is back. WSJ, Jan 18, 2007
Funny, but fundamental analysts who say "blame it on weird winter," or "there's more supply on hand now.." they just can't offer any good explanations for this shift. From an Elliott wave perspective, though, the reason for the slump in Crude Oil prices is obvious. There has been an intrinsic change in investors' and business owners' collective mood, as evidenced by the recent drop in the Crude Oil market.
In Elliott wave analysis, the highest confidence comes when the pattern is clear at several degrees of trend: The clearer the pattern and the more degrees of trend, the greater the probability that the forecast will come to pass. That is to say, it is difficult even in retrospect to make any connection between dramatic surprise events and what the market does.
Champions of news causality truly have a fundamental problem, which is that no investor really knows the implication of any piece of news. This fact is hidden by the ease with which financial news writers can retrospectively pull out from the plethora of news on any given day a story that appears to justify whatevermarket movement occurred.Conventional analysts try to reason from economics (China needs more oil) and political policy, which they call "the fundamentals", to mood (i.e., stock prices. This approach is backward, which is why it consistently fails at the most critical times. The so-called fundamentals are the caboose on the train.
Take a look at a weekly chart of Crude Oil. You'll see that between December 2005 and April 2006 last year, the index consolidated sideways in a pattern Elliotticians refer to as a triangle. Why is that important? Triangles only form in wave 4 of a 5-wave Elliott wave sequence. Which means that the Crude Oil's rally since May 2006 has most likely been a wave 5 – the final wave.
As you can see on the chart below, in the summer of 2006 a classic Elliott sequence has been completed, i.e., five-waves up.Even China's THIRST GROW hasn't prevented the market from falling:
China imported 14.5% more crude oil last year than in 2005,
and imports are likely to continue growing in the double-digits
in 2007 as the country's economy shows no sign of slowing
down and more of its strategic petroleum-reserve tanks.
WSJ, Jan 11, 2007
Peak Oil ?
(c) ELLIOTT today, 01/10/2007
Crude Oil, Weekly
While knowledge of current events and extramarket conditions has almost no value in predicting the stock market, knowledge about the position of the market can help predict changes in outside conditions. The Wave Principle provides a basis for speculating upon upcoming changes in market trends and therefore the events that result from the social psychology that the trend changes represent.
(The Wave Principle of Human Social Behavior, 1999, Robert R.Prechter)
Crude Oil [CL]
(c) ELLIOTT today, 01/10/2007
Five wave declines will confirm the start of major trend reversals and from its peak, crude oil fell in five waves down to $55,
a loss of $29.48. Even more interesting from a technical point of few, crude oil broke below the year-long trend channel
indicating a trend change of much bigger proportions. Prices pulled back to the lower trend line and again fell sharply
below the ML-1 (red-dotted line).According to the rules and guidelines of the Elliott Wave Principle, corrections tend to register their maximum retracement
within the span of travel of the previous fourth wave correction of one lesser degree, most commonly near the level of its terminus.
This level also marks the "fourth of the third" and as the lower ML channel line shows, $46-48 seems a reasonable target.
Crude Oil, daily
Chart: futuresource.com
An oil dispute between Russia and Belarus affects Central Europe.
(cnn money.com, January 9)
Talks between Russia and Belarus failed to reopen a major pipeline that delivers
up to 1.4 million barrels a day to key markets in Poland and Germany, Reuters reported.
Up until the collapse in talks, the pipeline closure had not moved prices much.
CNN money, Jan 10, 2007While knowledge of current events and extramarket conditions has almost no value in predicting the stock market, knowledge about the position of the market can help predict changes in outside conditions. The Wave Principle provides a basis for speculating upon upcoming changes in market trends and therefore the events that result from the social psychology that the trend changes represent.
(The Wave Principle of Human Social Behavior, 1999, Robert R.Prechter)
Fallende Ölnotierungen lassen Russlands Wirtschaft
alt aussehen, Die Welt online, 11.1.2007
Russland stellt Bedingungen für die Wiederaufnahme der Öllieferung
Die Welt, 10. Jan.2007
THE U.S. TRADE GAP NARROWED to $58.2 billion in November, the third straight month with a lower deficit, as exports of commercial airplanes hit an all-time high and the bill for foreign oil declined to the lowest level in more than a year. WSJ, Jan 10,2007
Stocks fell early Wednesday amid further weakness in oil prices and after Chevron said it expects results to be hurt by lower commodity prices. Markets declined in Europe and Asia. WSJ, Jan 10,2007
U.S. joins stock selloff
Wall St. opens lower, following declines in Asia and Europe on energy concerns.
cnn money, com , Jan 10, 2007
Oil stems slide after hitting 18-month low
Crude rebounds after reports say OPEC could keep prices in the $60s; fringe worries
about Russia-Belarus abound. CNNMoney.com, January 9 2007: 3:55 PM EST
NEW YORK (CNNMoney.com) -- Oil prices rebounded Thursday, recovering from 18-month lows after reports said talks between Russia and Belarus over a major pipeline closure fell through. In addition, a report said OPEC cuts could leave crude trading in the $60s for the rest of the year.
U.S. light crude for February delivery settled down 45 cents at $55.64 a barrel on the New York Mercantile Exchange, after falling below $54 a barrel in overnight trade.
Russian officials eye curbed output
Oil lower; inventory report due Speculators keep oil prices afloat
Goldman Sachs cuts oil forecast again
Looking for Iraq's oil
The country, which has one of the largest reserves in the world, could pump 6 million barrels a day or more.
But that sure isn't happening now. It's easy being green The eco-friendly house (and renovation) has gone
mainstream. But is it really worth the cost?