All Hail King Oil!

Bow to the barrel
All hail the King! King Oil, that is. I thought last week's crazy run-up in oil was due to Middle East politics. But this week's even bigger jump clearly indicates that Mr. Market has left the building and oil is now in the driver's seat. It matters not what candles the market put in last week so there's no point in putting up the weekly Dow chart the way I usually do.

Instead, today, we're going to look at oil, specifically crude oil futures. Here's the weekly chart going all the way back to 2008.You may want to click on the image to view it larger. I don't know about you, but I don't like the looks of this chart. Let's start off on the right-hand edge. Two weeks ago, oil opened at 93.75. It closed last week at 106.63. That's a 14% jump in two weeks.

Are you driving 14% more than you did two weeks ago? Are the airlines flying 14% more planes than they did two weeks ago? No and no. Is Libya a major oil exporter? No. It produces 2% of the world's output. Has it all gone offline? No. And the Saudis, who aren't stupid, have indicated a willingness to make up any shortfall.

So this trend is not being driven by supply and demand, it is pure speculation, exactly the way it was back in May of 2008. In fact, that's where we have to look to find the last comparable situation, which I have conveniently circled for you on the chart.

Historical comparison

Now here's the scary part. After that jump in 2008, it took eight more weeks before we finally hit the crazy blow-off top in the first week of July. And it only gets worse. Draw down from the prices in May 2008 to the indicators below the chart. Then compare that to today. We are right now if anything even less overbought than we were in 2008, implying that oil still has as much steam to go higher now as it did then. And oddly enough, if you follow the horizontal blue line that marks our current price level back to the left, it intersects the chart at the end of April 2008, just before the big two week jump.

On top of that, we're now hearing calls for oil to hit $200, just like back in 2008.

And we all know what happened to the economy in the fall of 2008 after oil had peaked.

Good news/bad news

Now for the good news, such as it is. First of all, I think oil has the same chance of hitting $200 this year that it had in 2008, ie. none. And if anyone tries to tell you that "this time is different", you can be sure that this time is exactly the same as last time. One thing that really is different though is that the economy is in a much different place than it was in early 2008. If your plane crashes from an altitude of 10 feet, your survival odds are a lot better than if you crash from 10,000 feet. Right now, the economy is nowhere near as overheated as it was back then.

Now I suppose that there's some apocalyptic combination of circumstances that could join together this year to throw us into an even worse spot than the Great Recession, and there are some people who still keep their fallout shelters stocked, just in case, but you can't really live your whole life that way. I just find it hard to believe that that's going to happen. Not when all the hard economic news coming out lately is actually good.

Nevertheless, clearly this oil nonsense is bad for the economy. But I don't think it's the end of the world (that comes next December 21st, according to the Mayans). And if history is any guide, it might just end with another collapse of oil prices back down to more reasonable levels. Like last time.

Where to next?

So how much longer? Well here is a weekly chart of the XOI, the Amex oil index, going back the same time period:I've drawn a rising regression trend channel on this starting with the low at the end of last June. Note that the Pearson's coefficient on this one is 0.991, an extraordinarily high number for a market regression. If you extrapolate this trend forward, where does it intersect the all-time high from 2008? June 13, 2011. Call it somewhere in the middle of June. That's when oil will hit $147 a barrel again. And oddly enough, that date is just about the same amount of time it took the last oil spike to top out. Look at the futures chart again. The peak? The last week of June 2008.

Possible outcomes

After that, it can either continue higher or collapse, just like last time. I'd be really surprised to see it go higher because I don't think the world economy can support it at this time. One other possibility is that oil will just spike exponentially and thereby hit the blow-off point before June. But based on what we've seen so far, it sure looks like we're getting ready to play 2008 over again..

So the bad news is that we still have about three more months of teeth gritting every time we fill up our tanks at the pump. But the good news is that it's not too late for you to be an oil speculator too and join in the fun. I don't normally play this sector, specifically because I believe it to be so highly manipulated, but obviously plenty of others do. And that's all she wrote.