Crude OilBob Hoye
October 6, 2007
Crude’s rally from 50 in January to 83 has been outstanding and is reaching the timewindow when an important high has been expected. On the technicals, the action is getting overbought in a manner recorded at the high of 78.40 in July, 2006.
We have been considering that this high would be an important test of the former high, and this seems to be the case. The extra boost provided by a severely pressured Fed is a gift.
The overall problem is and will be a cyclical credit contraction. Changes in the yield curve and credit spreads since May have been typical of the change seen at the culmination of previous financial manias.
This suggests that each outstanding high as it occurs for most commodities this year is likely to be a cyclical high. This has been the case for nickel in May, for example, and considering the resumption of the financial storm the hot ones now such as wheat and soybeans are working on a cyclical high. We will monitor the action in crude as the turn to the decline could be sudden.
At the secular high for crude oil in 1980 politicians in a number of hitherto sensible countries lost fiduciary responsibility and found ways to get in on the hot action. International agencies such as the U N became greedy enough to fantasize about all of the mineral wealth just lying on the ocean floors and crafted special laws of the sea etc. Then, with the long decline in real commodity prices that typically goes with a long bull market in financial assets the politically anxious lost interest.
In Canada the socialists in all parties joined the mania, and Ottawa formed Petro-Canada with the rationalization that it would give the Liberal Party an insight into the oil business. It was nonsense at the time and just an excuse for buying the hot action with other peoples’ money. Even in British Columbia a credit union announced it was seeking a way to directly invest in oil exploration.
And now they are baaack! The Province of Newfoundland has changed a deal on offshore production—to obtain a more risky interest the province is BUYING an equity position. Then just recently, the Alberta government issues a paper seeking to amend royalties to a much higher level.
A cyclical bear market for crude oil seems probable. Investors should begin to lighten up and upon appropriate technical advice both investors and traders can sell aggressively.
B HOYE, INSTITUTIONAL ADVISORS
October 6, 2007
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