Crude Oil Looking Parabolic
Crude oil has broken out to new all-time highs following statements from the European Central Bank they will not cut interest rates, due to inflation concerns. Crude oil is looking parabolic, but there are ways to trade the trend.
NYMEX crude oil futures broke above $109 a barrel, a price which seems to defy traditional fundamentals. I think crude oil’s rise has less to do with the usual supply and demand and political issues at this point. Crude oil rose to new heights despite the fact the Energy Information Administration cut its 2008 global demand forecast by 80,000 barrels a day due to weaker economic growth. Some analysts say we are already in the throes of recession, which should dampen demand.
I think investors are using crude and other commodities as an inflation hedge—and dollars are pouring in to these markets. Crude oil and other soaring commodities are also currency plays, as the U.S. dollar broke again to a record low against the euro.
Inflation seems to be a bigger concern for the European Central Bank than our Federal Reserve. At a press conference today, ECB council member Axel Weber said, “the surge in oil prices is a major concern and I don't think it leaves us any room for a loosening of our monetary policy.” In the euro zone, inflation has risen to 3.2 percent, the most in 14 years, due to accelerating energy and food prices. The euro gained to $1.5489 against the dollar after this news.
I don’t see the trend changing in the near-term. Just a few weeks ago, I would have said $110 crude oil seemed unlikely, and a big correction should be coming in this market. But now, I see a near-term target of $120 or more possible if these trends continue. It’s a bad time to pick tops. I normally advise waiting for pullbacks to buy into markets like this, but we are only seeing very short-term shorting opportunities for day traders.
If you are a longer-term investor, there is a way to get in on the trend. You might consider buying deferred contracts, building a core position, and trading around it. I would even consider going as far out as December 2009 or 2010, with risk parameters in place. Crude oil is experiencing backwardation, which means contracts dated futher in time have lower prices. For example, April crude oil futures are trading at about $108 currently, but July 2008 crude oil is trading at $104.41, and out to December 2008, $101.03, and even further to December 2009, it’s priced at $96.97. So you can take a long-term bullish position at better prices buying contracts further out.
Feel free to call me for more specific strategies in this or other markets to suit your individual risk tolerance, and ask about a special half-off offer for new clients.
Richard Ilczyszyn is a Senior Market Strategist with Lind Plus. He can be reached at 800-605-0095 or via email at rilczyszyn@lind-waldock.com.
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