The Santa Claus rally has been a long-held notion in stocks. This year, it's been even more evident in oil.
Over the past several sessions, crude oil has quietly crept up to approach $79 a barrel again. Although nothing seems to shock those following oil, it's important to understand the causes of this rally; why it's so much easier for oil to go up than go down; and why I still hold my $110 prediction for oil for the second quarter of 2010.
and through the rest of the news media, most analysts are pointing at cold weather in the Northeast and continuing political protests in Iran as the two fundamental reasons why oil has rallied so sharply recently. While these ideas make for easy stories, their effects have been small.
Two far more technical and far more powerful reasons can be ascribed to the recent move.
First, the historic contango -- when the futures price is above the expected future spot price -- in the oil market continues to "set a floor" for oil prices.
For those of you
of "the endless bid" and the oil contango, you know that the curve of prices continue to steepen, caused by the lack of commercial sellers of back months and the continued investment in oil as an asset class.
At no time has this very strange contango been more out of place and apparent than it is today -- amid a worldwide recession and slow recovery prospects.
But the contango has created a commercial and arbitrage carry opportunity. For commercial players, as the curve steepens, it increases profits to simply refuse to sell in the prompt market, store product and sell contracts further out on the curve for delivery in eight or 12 months. And the curve steepens markedly when the crude market goes down.
This happened in the recent downdraft for oil as the dollar strengthened, gold lost more than $125 an ounce, and oil returned to trade around $70. At that point, the 12-month contango approached $10, and sellers in the prompt markets dried up.
In essence, the "floor" in prices is set and supported by the contango.
It's not as if oil can't ever go down. But the sellers to make oil go significantly down need to be the speculators and investors, and not the commercial players deleveraging and moving into cash -- the exact "money off the table" mini-move we saw in the dollar, gold and oil recently.
As long as the contango continues, so will the trampolinelike floor in oil prices.
To add and assist the endless bid, we have reports this week of a 79-week high in inflows of capital into the equity markets of $11.1 billion. While numbers for the commodity markets are not as readily available, it is clear that inflows into commodity indices, managed futures and ETFs were equally strong in the last two weeks.
Do you think that had something to do with the Santa Claus rally in oil? I certainly think it had a lot more to do with it than some normal winter weather.
Top 2010 Stocks: Oil Rigs
Continued inflows of capital, combined with contango price floors, will make oil much more likely to increase in price -- no matter what the economic and fundamental picture. I'm making plans for 2010 that include $100-prices -- and you should, too.
One way to do this is with the oil service stocks, including one of my top stocks for 2010,
. But don't forget others in this sector, including
At the time of publication, Dicker was long BHI, 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 degree from the State University of New York at Stony Brook in 1982.