Crude Oil Parabolic Move Driven by Inflation Hedging that Could Unwind
Commodities / Crude Oil Jul 16, 2008 - 12:15 AMBy: Nadeem_Walayat
Having turned bearish on crude oil during the run up to above $146, and without repeating recent analysis that in summary had an initial target for a decline to $135 and a secondary target of $110 on break of $135 amidst a background of a possible spike higher following an attack on Iran, which I concluded as a low probability event of less than 20%.
What is of critical importance is to remind oil investors waiting for a parabolic rise, that we are already well into a parabolic move in crude oil. Therefore waiting for a move to between $200 and $300 would be in addition to the existing parabolic move from $50 to $147 just a day ago.
The parabolic move began as speculators and investors started to pile into crude oil derivatives following the break above $80 in Sept 07, this set potential targets for crude oil for 2008 as between $120 and $160, with resistance points along the way of $100 and $110 and $125 based on technical analysis as the below graph illustrates, where analysis settled upon a target for crude oil of $150, as basically 200% of the $50 low and a nice distant round number. The move to the recent high of $147 has been far faster than anyone could have possibly imagined even as recently as 3 months ago to occur under normal trading circumstances i.e without the impact of a Black Swan event as mentioned earlier.
Whilst we are all aware that the rise in crude oil prices is contributing to the surge in global inflation, what the rise in crude oil since the break above $80 has also achieved is a large influx of speculators and investors seeking to utilise the highly liquid and leveraged global oil markets as a means to HEDGING against inflation, and thereby igniting the parabolic move that in turn drives inflation countered by even more hedging against inflation by buying crude oil derivatives and so on and so on, leading to an extremely volatile parabolic state that could at literally any point lead to an unraveling of the crude oil rally all the way BACK DOWN to the $80 BREAKOUT POINT ! The trigger for which would be if future economic conditions were seen to deteriorate to the point where inflation was no longer seen as a threat, and therefore no longer necessary to have as much inflation hedging as has occurred over recent months which has been one of the primary drivers of the parabolic move.
The recent blowup in the financial's may be seen as such a trigger i.e. the final nail in the economic coffin that would be seen as ensuring a deep deflationary recession during 2009.
In Conclusion
Crude Oil is well into a parabolic up move that has been driven higher by inflation hedging which had fed upon itself, the potential exists for a near imminent cascading mainstream interpretation of future economic conditions to suggest lower future inflation which would lead to a fast paced decline in oil prices targeting a move back towards the September 2007 breakout point of $80. With stop-gaps along the way of $135, $110, $100 and $85. Therefore I continue to remain bearish on the prospects for crude oil during the next 3 to 6 months or so barring a BLACK SWAN event.
By Nadeem Walayat
http://www.marketoracle.co.uk
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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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