Oil prices: precursor or bubble?

By Benedict De Meulemeester

By Benedict De Meulemeester on 27/05/2009

It looks like the bulls are staging a massive invasion of the oil market these days. In the past week, as stock markets retreated from having rallied higher, the oil price continued to hover around 60 dollar. Yesterday, Wall Street passed the day in a more upbeat mood. This was due to figures that indicate that consumer confidence in the United States has recovered somewhat. As such, the oil price is now nearing the 62 dollar barrier and has risen above its 200-day moving average. According to our technical analysis, a key resistance level is waiting at 62,5 dollar. It will be very interesting to observe whether the bulls can take that hurdle as well.

What is startling us, is the fact that oil is the only energy market where the bullish mood is so outspoken. Coal and natural gas markets are still in a horizontal mood. Electricity has risen, but not to the same extent as oil prices. Moreover, oil prices seem to ignore their own fundamentals. The drop in oil demand is still larger than anyone had ever expected. This causes organisations like the IEA to describe the current bull trend as a bubble.

Maybe they will prove to be right. On the other hand, it would not be the first time that a so-called bubble in the oil markets was the precursor of a broader bullish trend. If the current mood in the oil market shows us one thing, it is that many people in the oil market seem to be confident that demand erosion will stop soon. Of course this is a speculation. But sometimes, speculators get it right. Better be careful then and watch out for the 62,5 dollar level carefully.

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