Crude Oil is Still Trending Up: A Personal Commentary

Crude Oil hit a high of $139 last night (July 2008 NYMEX Light contract). I trust the following charts are self-explanatory.

Weekly Chart - July 2008 NYMEX Light contract.

Daily Chart - July 2008 NYMEX Light contract.

Comments

In the last 2 weeks (after hitting a peak of $135 and prices falling slightly), I mentioned in my chatbox that we should still regard crude oil as still trending up until we see some signs of weaknesses (e.g. not violating support at around $118-$119). Then, we would hit cautious mode, sell some / all, and reevaluate. As it turns out, the support was never tested at all.

The last 2 days gain had so much force, that it is still very strong. Yesterday's gain especially.

$135 resistance was broken quite easily.

Any competent chartist capable of drawing up-trend lines can draw several different types of up-trend lines that NONE of them will dare to say that this animal is downtrending.

Yes, it's exponential rise.

I believe most exponential rise will eventually crash - usually, it's just a matter of time. But the relatively recent entry of "index speculators" in the last 5 years has changed the fundamental game somewhat, that the previous $40 resistance 5 years ago has shifted upwards. It is estimated that "index speculators" purchase is almost equivalent in size to another China consumption in last 5 years.

In the mean time, exponential rise can rise higher than anyone can predict. At the time of writing, $150 looks more likely now, and even $200 is still possible and cannot be written off.

So far, still no definitive sign of slowing down.

However, one subtle difference worth monitoring is the long term contract prices (e.g. 2010, or 2015). Unlike May 21-22 rise which occured across most durations, yesterday's rise seem to concentrate at the shorter than longer duration. This may signal the return of the traditional speculators vs the index speculators.

Implications

With our recent fuel hike, if the up-trend continues, expect higher Petrol prices than $2.70 per litre.

Expect higher general inflation.

If Bank Negara and the banks do not raise interest rates, expect negative real interest rates which will get bigger. Expect to lose purchasing power over time from Fixed Deposits investment only.

Expect higher operating expenses for ALL businesses (such as those relating to fuel usage & general expenses).

Expect some businesses to not be able to pass on the higher costs than others, with harder profit squeeze (if there is any profit left).

Expect PETRONAS (as a direct producer of crude oil) to be the biggest beneficiary. I suspect, not inconceivable that Petronas gains alone will exceed all 100 KLCI stock components, although I haven't seen any calculations.

Expect TENAGA operating costs (Gas and Coal Costs) to rise further. It is unclear if TENAGA will be allowed another tariff hike after the one announced on June 5. It will be a record, if TENAGA is allowed another tariff hike even before the one announced in June 5 is implemented!

Expect O&G sector to eventually be relative beneficiary to other sectors, although remember, this is not a direct relationship. Remember, O&G businesses will also be hit hard by the higher general inflation and they are not immune.

Expect our own backyard CPO sector to also be a relative beneficiary to other sectors, since eventually, there will be some correlation (not direct link) to the crude oil rise. Note our CPO stocks are more affected by CPO prices than necessarily crude oil prices.

Expect sectors that uses relatively more energy (as % of net earnings) to be hit harder.

I am sure you can add on to this short list.

Good luck.