Oil is looking like an unstoppable beast, recently trading over $90 (U.S.) a barrel. But there are three market factors that are telling me that this move is not a temporary one and will set the stage for a powerful follow-though, sending oil over $100 dollars a barrel by the second quarter of 2011.
Now is the time to buy integrated oil stocks, still the best proxy for crude prices, despite how far many of them have run already in the last two months.
One of the rare market factors convincing me of the strength of this move is the action of the European Brent crude benchmark. While Brent is a sweet grade of crude, like the U.S. benchmark West Texas Intermediate, it normally trades at a discount to its American counterpart.
But during this rally, Brent has maintained a strong premium to WTI, reaching a pretty steep $2.50 recently. This, in and of itself, is not all that unusual, but combined with fears of European growth difficulties, it is rare to see this move being led by the European market. It points to a general market move of rare and incredible strength.
Another very rare disconnect that is pointing to higher prices is how the dollar/oil trade has come apart so completely recently. With a dollar-denominated asset like oil, we normally see the dollar move in opposite directions to crude oil and this has mostly been the case.
But in the most recent two weeks, the dollar has managed an impressive rally while being unable to staunch oil's uptick much if any. Since Nov. 17, oil has rallied more than 10 per cent, while the dollar has also marginally improved, up almost 5 per cent. This isn't supposed to happen. It is clear that the oil move is entirely too strong to be deterred, even by a rallying greenback.
Finally, there is an historic flattening of the crude curve that is going on. Since 2008, oil has laboured under a very difficult contango market, where the months for prompt delivery of crude have traded at deep discounts to months in the very back.
But in the last several weeks, these spreads between months have been slowly shrinking and now look poised to actually turn around and "flip." This is a rare but very powerful event we haven't seen in the crude market since 2007, when oil rallied from $50 to over $90 dollars a barrel, on its way in 2008 to that acrophobic $147 dollar high price during that summer. That's telling me just how strong this crude rally is.
It's rare when you see one or two trading indicators that will telegraph an impending move or a continued move in oil. But when you see three, it's almost scary. That's what I'm seeing now and it looks like $100 crude is imminent.
Playing this move couldn't be easier. Integrated oil stocks have historically been the best proxies for an increasing price of the crude barrel.
Despite the fact that the biggest of these, ExxonMobil , Conoco-Phillips and Chevron have been reaching 52-week highs, a continued rally in oil prices should translate into further gains for these issues.
And they're relatively safe ways to play the move, too, as opposed to getting involved in futures markets or, UGH, the oil ETF's like United States Oil Fund or the iPath oil index -- the worst investments in the world.
A continued move up for oil seems to be coming. Position yourself correctly for 2011 with solid, safe and dependable integrated oil stocks.
Dan Dicker, a senior contributor to TheStreet.com, has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is also a licensed commodities trade adviser.
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- Crude Oil Front Month Futures$41.69+0.04(+0.10%)
- Exxon Mobil Corp$81.660.00(0.00%)
- Chevron Corp$91.320.00(0.00%)
- United States Oil Fund LP$12.930.00(0.00%)
- Barclays Bank PLC iPath Exchange Traded Notes Linked to Goldman Sachs Crude Oil Total Return Index$7.520.00(0.00%)
- Updated November 30 4:00 PM -5GMT. Delayed by at least 15 minutes.