Oil Rally: Is A 2008 Repeat In The Cards?

March 23, 2012 | By More

In case you haven’t noticed, bulls are still in control of the oil market…

After bottoming at $94 a barrel in late 2011, crude cruised higher to hit $110 in late February.  Prices have since pulled back, but oil’s still trading north of $105… not cheap by any standards.

The primary market-moving factor is the well-publicized standoff with Iran.  Worries over the rogue country’s nuclear program have added a substantial fear premium to the price of crude.

Depending on who you listen to, oil prices are jacked up anywhere from $5 to $10 a barrel.  Until the situation cools, bulls will likely remain in the driver’s seat.

However, bulls better pay close attention…

A number of interesting developments over the past week suggest there’s a concerted global effort to bring crude prices back down.

What am I talking about?

First of all, in a rare announcement on Tuesday, Saudi Arabian oil minister Ali Naimi said the country could increase production by 25%.  If needed, the world’s largest oil producer could pump an additional 2.5 million barrels per day (bpd) to ease upward pressure.

It was an interesting comment with peculiar timing…

Keep in mind, the Saudis are already running production at 30-year highs. If they really have that much spare capacity, then oil truly has no business trading over $100 a barrel.

And that’s not all…

Bulls took a temporary beating last Thursday when a surprise headline shocked the market.  According to an exclusive Reuters news release, the US and Great Britain planned to release crude from Strategic Petroleum Reserves (SPR).  Of course, crude dropped like a stone when the story first hit.

But it wasn’t long before officials denied the story…

It turns out, US President Obama and UK Prime Minister David Cameron merely talked about releasing emergency crude later this year.  There was no specific agreement or timetable given for an SPR release.

Not surprisingly, crude immediately rallied after the truth came out.

I don’t know about you, but I think there’s a hidden agenda behind these ‘news releases’…

If you ask me, high-ranking government officials are getting nervous. These recent surprise articles are an attempt to scare crude prices down… and for good reason.

Many respected oil market analysts believe crude is setting up for another move higher.  In fact, some think oil will make another bull run similar to 2008 when it surged to $147 a barrel.  And that’s not even accounting for the standoff with Iran.

Will this oil market scare tactic work?

Your guess is as good as mine.

But for the sake of the economy, I sure hope so.  I don’t care what anybody says, oil at $110 a barrel and higher slows economic growth.  The last thing we need is $5 gas across the US.

Unless it can break solidly below $104 (the lower blue line) in coming weeks, crude will remain in a strong uptrend.  However, if oil breaks higher, then I wouldn’t be surprised to see it trade to the upper blue trend line at $112… or higher.

Bottom line…

Until Saudi Arabia actually puts that spare 2.5 million bpd onto the market, or there’s an actual SPR release… oil’s going to remain at frothy levels.

And to make the situation even more interesting, the summer driving season isn’t far off.  Warm summer temperatures lead to long road trips here in the US.  And that means oil demand is set to move even higher.

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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