It doesn’t look like the summer of 2008 will repeat itself in the oil market. Nonetheless, it’s tough to ignore oil’s big run over the last few months and how it’s now trading above $90 a barrel.
Surging crude comes as many other commodities have also soared to multi-year highs. But with oil above $90, market technicians are turning even more bullish on its next move. My Technically Speaking column today highlights what chart watchers believe is next for oil:
Market technicians stress this is a significant level because it represents a 50% retracement from oil’s 2008 peak to trough, when it hit an all-time high that summer before bottoming out later that year.
Crude trading above $90 also marks a psychological victory. Investors tend to get giddy when an asset price hits a large round number. Breaking above $90 and holding that level is seen as an important development for bullish oil investors.
“For better or worse, people tend to focus on these psychological numbers,” said Richard Ross, global technical strategist at Auerbach Grayson. “Taking out an important retracement level that coincides with big psychological resistance is quite bullish and has generated a buy signal for crude.”…
Oil demand has been rising slowly during the global economic recovery. Inventories of oil and fuel stockpiles in the U.S., the world’s largest oil consumer, have steadily declined from 27-year highs in September. Demand in Latin America and Asia continues to grow as well.
Rising demand combined with a slower increase in oil prices, as compared with the 2007-08 run-up, have made analysts optimistic that oil prices can keep increasing.
“Momentum is very strong in commodities in general and we don’t see that trend ending anytime soon,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “Crude breaking out for the time being is a definite positive for the overall stock market. There will come a point when higher crude chokes off the economy. But we’re definitely not there yet.”
Detrick’s quote is very telling. There will come a point when rising oil prices will really crimp the consumer and become a deterrent for the economic recovery. That’s what we saw in 2008 when oil surged above $145 a barrel.
The tricky thing is figuring out what level rising oil switches from a positive development to a detriment on the economy.
For now, bullish sentiment prevails regarding rising oil.