Jean Temkin
14 January 2008
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Johannesburg — NEWS of the surge in the number of option contracts written in New York to buy oil for $200 a barrel was one of last week's scariest reports.
It told us how option contracts, which are the cheapest way to speculate in energy markets, have risen 36% since early last month. At the same time, the International Energy Agency reckons that demand for oil will rise 2,5% this year. To see if these contract writers are astute or crazy, I have used some of my technical analysis tools to consider the possibilities.
Last week I produced a chart of the relationship between the dollar -euro exchange rate and the gold price. The chart illustrated that the dollar gold price and the greenback see-saw against each other. This week's chart is similar, but this time I have shown the correlation between the Brent crude oil price and the dollar -euro exchange rate. The two charts tend to back my theory that, rather than commodity demand, it is dollar weakness that is causing ructions.
The dollar -euro chart plotting shows how many euros can be bought for one dollar and, since it came into being, a euro has been able to buy ever more dollars. I have enclosed both plottings in standard deviation channels, the width of which takes into account the extreme highs and the extreme lows of each plotting. The centre line between the channels is the equilibrium, the linear regression balancing point to which plottings are drawn. What's unusual is that the width of the two channels is exactly the same, showing that oil and the dollar have strayed away from the equilibrium by exactly the same amount; hence my theory that the rising oil price is dictated by the falling value of the dollar.
Worrying is that the oil price plotting on the far right is nudging at the resistance. If it breaks through, the choice is widening the channel or drawing a new channel starting at last January's low, which would make $200 a barrel a possibility. A new channel for oil but the same channel for the dollar would disprove my theory that a close correlation between the dollar and oil has existed since 2001. However, the oil price is quoted in dollars, and the currencies of several oil producers are linked to the dollar. Does this mean that these producers are receiving exactly the same value for their oil as in 2001?
Close to the resistance edge (top) of the channel suggests that oil is overbought in the long term, while the dollar -euro exchange rate is close to its equilibrium and, therefore, at a normal level. Bearing in mind that subsequent counts lose credibility, in the past few weeks new counts from oil's point-and-figure chart to $122 and $131 have appeared. The next downcount for the dollar is € 1/$6,08 and the one after € 1/$5,78.
The business confidence index has slumped to a four-year low and the JSE overall index has taken a dive. Starting at the 2003, the standard deviation plotting of the overall shows it below the 29494 equilibrium, but well supported at 26202. While plodding along the bottom of a cycle, the overall's forward projection on its cycle trend chart is sideways. Looking on the black side, the overall index has a downcount to 23793, which, if it were fulfilled, would take it back to the November 2006 level.
Last week's few winners featured among the mining group. As the dollar gold price moved up, despite a slight strengthening of the rand -dollar exchange rate, the rand gold price reached a new high. However, now overbought, both it and Newgold, might lose a little in the short term. The gold share index is fast approaching an overbought level and might therefore pause for a while, but DRD, Goldfields and Simmers might have a little more to gain. Platinum is nudging slightly better along a plateau that began at Christmas . Among the shares, Lonmin looks as if it could gain a little more.
Jean Temkin is the author of More Charting for Profit, a textbook on technical analysis.
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I liked your analysis. However I am not sure that the analysis is a valid forward looking one.
There is one big overriding part of the equation. All the World Pundits say we passed peak-Oil in 2007.
There is severe speculation that Saudi Arabia is fudging its reserves.
There is almost immutable arithmetic which shows that the Oil Energy Cost of Investment is dropping from (probably 1000, or 500 to 1) down to about 20:1 often approaching 10:1 and in our lifetime will drop to about5:1
Saudi's main reserves of 50 years ago were a gift (500-1000:1). The Tar Sands (Probably will never do better than 5:1) and the Deep Sea wells are always increasing in Energy cost compared with Energy return.
All the other Energy Alternatives hover around 5:1 including Nuclear. Alcohol is below one. Solar around 1-2:1
The US is busy fiddling the Geopolitical books at present.
Oil will soon be a free for all and bear no relationship to anything except the ability to afford it.
This is Third World War stuff
Graham Reinders.