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Oil Rising: $80, $94 a Barrel on the Horizon   (April 12, 2006)


While the precise cause of the next leap in oil prices is unknown, we can safely predict oil will soon reach $80 a barrel--with predictably calamitous effects on the global economy. Will it be Iran, Iraq, terrorism, Nigerian rebels, Venezuela, or a combination of all of these? That is unknown. But what is known is the next stop in oil prices is $80 a barrel.

First, let's review the fundamentals which are driving prices ever higher--supply cannot keep pace with demand, and there is virtually no production slack available to meet higher demand. For a cogent summary, let's turn to the Wall Street Journal of April 10: Oil Prices Show No Sign of Slowing; Tight Supplies, Capacity Spark Talk That Crude Could Reach $80 a Barrel.

Is this number pulled from a hat? No--and here's why. Technical analysts have long been fascinated by the way the stock market's apprently random movements seem to settle on levels based on the so-called Fibonacci numbers, .38 and .62. These are ratios established by the Renaissance-era Italian mathematician Fibonacci. (.5 and 1 are also part of the series.)

I've drawn lines on this chart to illustrate the uncanny tracking of oil prices to Fibonacci series numbers. First, we see that oil had settled at around $42 at the beginning of 2005. Such "settling" is called support and resistance in stock market lingo, as prices seem to resist going above (resistance) or much below (support) a level. If we calculate the two Fibo numbers from $42, we get price targets of $58 and $68.

($42 X .38 = $16, $16 + $42 = $58) ($42 X .62 = $26, $42 + $26 = $68)

Voila, as if my magic oil rose to a support/resistance at $58, and then climbed up to the $68 level, where it sits today. Seeing how accurately the Fibo numbers have predicted the price of oil, let's extend the series into the future. Since oil settled into a new resistance/ support level at $58, we'll start a new series from there.

($58 X .38 = $22, $22 + $58 = $80) ($58 X .62 = $36, $58 + $36 = $94)

Other analysts may prefer to work with the $42 level, which can be extended thusly: ($42 X 1.38 = $58, $58 + $42 = $100). After examining this chart, can you really doubt that oil will go to $80, or even $94? If so, why? Wishful thinking doesn't count.


For more on this subject and a wide array of other topics, please visit my weblog.

                                                           


copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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