It's a good time to take an updated look at oil, because the paradoxes we observed regarding gold and silver, which we looked at in yesterday's new Gold and Silver Market updates are much more extreme in the case of oil.On the latest 5-year chart for Light Crude we see that oil has in recent weeks succeeding in breaking out of its giant Head-and-Shoulders base pattern at last. We also see that volume has expanded greatly over the past two years which is viewed as a sign of a completing bottom. Recent strong upside volume has driven both volume indicators to new highs, despite the price still being way below its 2013 highs—this is viewed as a very bullish sign, and suggests that oil will advance at least to the $80 area.
Chart courtesy of www.sentimentrader.com So what is to be made of this enormous contradiction? The oil charts look flat out bullish, but the oil COTs and Hedgers are at extremes that normally call for a drop. A key point to make here is that high Commercial short and Large Spec long positions do not necessarily mean an immediate drop—these positions can get more extreme still as the price rises before an eventual reaction back occurs, and there is a major fundamental development underway that may lead to that happening.
One explanation of what we are seeing on the oil price charts in the face of seemingly contradictory COT and Hedgers data is the possibility of Saudi Arabia attacking Iran. Clearly, if Iran does come under an attack, the oil price could go through the roof, possibly way beyond $80, hardly surprising since it would probably close the Straits of Hormuz, through which 20% of the world's oil still flows. Keep in mind though that this scenario will not become reality next week; it will likely take time to build up to it. But if it becomes increasingly clear that this is on the cards, we can expect the oil price to advance ahead of it.
Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years' experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a Diploma in Technical Analysis from the UK Society of Technical Analysts.
Want to read more Energy Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent articles and interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) Statements and opinions expressed are the opinions of Clive Maund and not of Streetwise Reports or its officers. Clive Maund is wholly responsible for the validity of the statements. Streetwise Reports was not involved in the content preparation. Clive Maund was not paid by Streetwise Reports LLC for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
Charts provided by the author.