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Oil Market update

Clive Maund
June 20, 2005

Oil and oil stocks have gone and done it, broken out to new highs, as expected, and they didn't even bother to consolidate beneath resistance at the Spring highs before doing so. Despite becoming increasingly overbought, the uptrend is likely to continue, although the overbought condition is expected to lead to brief periods of consolidation or reaction along the way.

When you stop and think about the speed at which this resource is being burned up, it is hardly surprising that there is now an almost relentless upward pressure on prices, and it's likely to get much worse (better if you're an oil stock investor). If you look around you in any big city or at a major airport where in excess of 1000 flights arrive and depart per day, the scale of consumption of this resource is mind-boggling. If you then reflect on the fact that the vast up-and-coming populations of countries like China and India, something like 2.5 billion people, all crave massively increased consumption of consumer goodies, most of which require oil for their production, and factor in that the world population is expected to increase by another 50% by 2050, you don't have to be a financial genius to figure out that the upward pressure on oil prices will become massive and relentless. When you grasp this you instantly realize why the US is attempting to stake out Iraq - it's a modern version of the Oklahoma land rush.

While the vast majority of the major oil stocks are expected to perform very well as the price of oil continues to rise, some will perform better than others. A simple and practical way of choosing the better ones is to chart each of them against a major index, such as the OIX oil index, in order to gauge their relative strength. Two examples of out performers are Conoco Phillips and Marathon Oil, whose charts are shown above. Although overbought, both should have significantly further to go before this particular intermediate uptrend has run its course.

Clive Maund

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany.

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No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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