Storms Loom in Energy Charts

Crude oil has finally gotten the undivided attention of an analyst community that had been playing a dangerous game of denial. Wal-Mart's(WMT Quote - Cramer on WMT - Stock Picks) admission that energy costs were affecting its bottom line sounded a wake-up call to the entire business world, and coupled with Hurricane Katrina, energy now becomes the perfect excuse for misfiring sales and poor operating results.

Let's examine the energy markets to see where they're headed as we approach the winter heating season. And what about energy stocks, which have been underperforming the futures contracts this summer? Does their failure to print new highs foretell a top in crude prices?

Hurricane Katrina throws a big-time monkey wrench into the short-term analysis of the crude oil markets. But don't confuse its considerable influence with the commodity's longer-term outlook.

Supply disruptions triggered by Gulf Coast rig or refinery damage will spike crude prices, because short-sellers will be unwilling to hold their ground. But its a two-edged sword, because the volatility could trigger a climax that leads to a seasonally favorable decline.

Notice what happens if crude oil reaches over $70 in the short term. It would tag the upper boundary of a developing parallel channel. But that level could signal an intermediate high for a pullback lasting six to eight weeks. This decline could be deep and dangerous for energy longs, carrying the commodity back into the mid $50s.

Now let's move to the natural gas futures contract, which tagged $10 for the first time since 2001 last week. Though prior run-ups have faded quickly, the commodity is now in a position to rally well above this historic number. Hurricane Katrina ensures the commodity will jump above resistance this week, but don't expect that move to hold.

It's unlikely that rally will gather momentum until the heating season is underway. The winter months attract a huge crowd of energy speculators, for obvious reasons. Most likely the real natural gas breakout will require an oversupply of weak handed short-sellers on the wrong side of bullish supply news.

Alternatively, this week's spike should offer an attractive entry for aggressive short-sellers, as long as they cover positions in a few weeks or months. What's the time frame and target for this pullback? The commodity should start a four-week to six-week decline that penetrates $8 before the contract stabilizes.

Unleaded gasoline looks nothing like the crude oil or natural gas futures. That's very bad news for pump prices worldwide. The contract has been moving higher in stable wave-motion since late 2001, when it dropped briefly below 50 cents. The rally has picked up steam since May, with the commodity rising 40% in just 12 weeks.

Unleaded gas pivoted off resistance at the $2 level a few weeks ago, as the end of the summer driving season spooked energy traders. But it will be back to test that key price level again soon. And hurricane damage could overcome favorable seasonality in the days ahead.

Gulf states receive more than half of U.S. oil imports and are home to 50% of the nation's refining capacity. In fact, there are key refineries in the direct path of the catastrophic storm. So unleaded gasoline may test key August resistance a lot sooner than expected.

This will be a tough winter for everyone that needs heating oil to stay out of the cold. Note how the heating oil chart bears a strong resemblance to crude oil. But this contract stirs greater anxiety because of its direct impact on family budgets when the weather turns cold.

Like crude oil, heating oil futures are rallying toward resistance at a rising parallel channel. But there's nothing in the pattern to suggest substantially lower prices any time soon. At best, the commodity could print a 30-cent pullback in the next few months.

Energy traders are licking their lips with heating-related commodities. We're headed into the season when weather gurus, like Accuweather's Joe Bastardi, will trigger big moves trumping the National Weather Service on cold-outbreak or January-thaw predictions. The bottom line: don't expect relief from high heating oil prices this year.

Finally let's consider the limp behavior of energy stocks right now. In fact, one analyst just predicted a crude oil top by comparing current equity behavior to 1980, when oil stocks ignored rising crude and signaled a major reversal. But the bearish call is dead wrong because the divergence between equity and commodity is a total illusion.

Consider the three-month trough to peak performance in the Oil Service HOLDRs Trust (OIH Quote - Cramer on OIH - Stock Picks) and crude oil contract. Over this period, the Trust rose to $120 from $85, marking a 41% price gain. At the same time, crude oil rose from $48 to $68, printing an identical 41% gain. So where's the divergence?

Of course, there is none. The two markets remain closely correlated, although the tug and pull between contract and equity leads to performance aberrations over the short term. It's just the kind of meaningless noise that analysts jump on to support wrong-headed predictions.