The Unstoppable Oil Market

These days, oil just can't be stopped.

I've been guilty, at least as much as any oil analyst and trader out there, in viewing it as a banded commodity.

Since it slipped into the low-$50 area in mid-January, I've been predicting that oil would remain stuck inside a $55-$65 range for the rest of the year.

So far, that hasn't been a bad prediction.

After all, the oil market has traded within that area for the most part, and West Texas Intermediate crude, the grade that is traded on the New York Mercantile Exchange and is the benchmark for the U.S., was trading around $63 this morning for delivery in May.

But that is far from telling the whole story, and it would be a bad cape for me to hide behind.

Let me use the following charts to show you where I've gone wrong:

West Texas Intermediate Crude

Click here for larger image.

Source: www.cqg.com

From this chart, I look pretty good: The market has traded very technically indeed, banded tightly by the 20-day Bollinger bands and reacting well to crosses of slow and fast stochastic lines. But even here, the extensions and overextension we have seen -- for example, in late February and particularly in late March -- have all been to the upside, while bouncing significantly more quickly off the lower bands the market touched in mid-March.

Now, let's bring in the damning evidence, the stuff that convinces me that the oil market cannot be stopped:

A Look at Brent Crude

Click here for larger image.

Source: www.cqg.com

Here's a chart for Brent crude, which trades on the IntercontinentalExchange and is the major grade of North Sea crude oils, the recognized benchmark for Europe. Now, does that look like a banded commodity to you? No, it doesn't look like that to me, either.

Since a mirrored move down to the low-$50 area in mid-January, Brent has been on a tear, trading as bullishly as West Texas Intermediate crude did in the middle months of 2006. We've consequently seen a crazy shift in the spread between WTI and Brent in the past two months, to an unprecedented $5.50 per barrel yesterday:

Spread Between Brent and WTI

Click here for larger image.

Source: www.cqg.com

What's been causing this is a unique series of events experienced by the domestic refineries, which I discussed in a previous column. Outages, combined with maintenance needed to gear up for the big summer driving season, have put gas cracks into the stratosphere and left a glut of WTI crude languishing at the delivery point in Cushing, Okla., with nowhere to go.

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At the time of publication, Dicker had no positions in any stocks mentioned, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.