Has The Oil Bubble Finally Burst?

Click the graph below for a larger image.

A few observations but first understand that this chart is for USO. Its movements tend to reflect the movement in the price of a barrel of oil but the absolute value is not the same. (USO is currently at 102/share and oil is around 126/barrel.)

1. Two long term bull trend lines (green and purple) remain intact, but the most recent bull trend (light blue) support has been significantly penetrated on strong volume.
2. The support of the 20 and 50 day moving averages has failed and price is now below them. The 50 in particular had been prviding strong support during the most recent rise. The 20 average is moving downward, the 50 day is rounding, but prices are well above the 200 day average.
3. This latest downward move was well predicted by a negative MACD divergence which I have indicated with black lines on the price and MACD chart. This divergence shows the move from the June 08 price peak to the July price peak was not confirmed by the action in MACD.
4. I have also shown with black lines the same type of negative divergence that occurred from early December 07 to early January 08. In that instance prices simply consolidated their previous gains until the mid February bull breakout which started the most current bull trend line.
5. We could be in a consolidation pattern again but notice that in the earlier divergence the 50 day moving average acted as support for the consolidation; in the current case it has been violated. Also notice that in the earlier divergence the volume was not unusual; in the current divergence we see volume starting to build in march 08 and very strong volume on the actual downtrend beginning in early July. Certainly the March to July volume appears speculative and not unlike volume patterns often associated with the final stages of a bubble (blow off tops).
6. The four light blue bars are Fibonacci retracement levels from the beginning of the most recent trend line (February 08) to the current high in July. Price is sitting at 102.38 as I type, hovering just above support at 100.17, the 38.2% Fibonacci retracement level. Should this support fail the next Fibonacci support is 94.30 with a bit of technical support above that provided by the mid April high of 95, indicated by the gray line. The support at 102.38 appears crucial for the bull case. If it gets taken out the 50 day moving average will have turned down as well and the 200 day will likely have gone flat. We would also likely see the 20 day average move below the 50 day which would be very bearish technically.
7. Points to watch on the way down: Notice how nicely the Fibonacci 61.8 % and mid March peak line up (another gray line.) That area should provide strong support. Finally notice how, should that fail, the Fibonacci 100% will likely be aligned with the 200 day average.
8. Short term upside resistance for USO appears to be around 110. That will be the bulls target to once again establish control.
   

So has the bubble burst?
Not yet. This chart is still a correction within a bull market but for the first time this year short term speculators will likely find the bear case (AGAIN I SAID SHORT TERM) at least as attractive as is the bull. For those keeping score a $90 on USO probably means a barrel price around $110 and a $70 USO probably puts a barrel around $86.

What about fundamentals? There has never been a fundamental case for the degree of oil price rise we have seen. The only fundamental driver, IMHO, has beet he decline in the value of the dollar and that would put a barrel at perhaps the 60-80 range. People who argue that supply and demand have driven the price are, again IMHO, really confused; they think the market is pricing in now the pressures that oil might feel in 10 or 20 years; markets don't act that way, they don't think THAT far ahead. People however sometimes do so I think its fair to argue that PERCEPTION of a fundamental issue (in this case supply/demand,the peak oil scenario) has powered some of the bubble.

Lately reality has been making a bit of a comeback perception-wise. Demand is showing much less acceleration, (and in some cases actually decreasing), supply has had positive news of late, and the Iraq and Iran outlooks are perceived to be becoming more stable. Some governments and companies are making more serious noises about conservation and alternative sourcing. What would be the last shoe to drop if you follow fundamentals? I think that would be a world tightening of interest rates as the fear of inflation increases. The US being in the worst financial shape will likely be the last to tighten, but tighten it will and then the fear of recession will be the final excuse from the fundamentalists for the bursting of the bubble which the charts are already suggesting.

Bottom line: I am not a fan of fundamentals but the perception of them is significantly improved compared to say, January. I had said all along oil at 60 before 200. I will now add that I think 40 is very possible.

UPDATE: In the 4 hours since I posted USO has now closed around 100. (See item 6 above.) Upside resistance is now around 107.50. I actually expected a reaction back up to the 110 area before additional damage was done.

Kurzweil Continued

P-man,over at Emergent Ink, is a good friend and I have enjoyed arguing with him for many years now; he's a strong thinker. He is also what I would call a Peak Oil Pessimist (although I am sure he would consider himself a realist, not a pessimist.) He has read and linked to my previous post on Kurzweil and solar energy, and I thank him for that. And he has posted a rejoinder to Kurzweil and solar that is well worth a read.

However I have a few bones to pick;

#1         P-man seems a bit too skeptical of Ray's prophecies.

That is to say my rating of the estimated prophet is a bit higher than P's.

 #2        (and somewhat more salient)  P-man is convinced that, even if the  growth rate Kurzweil predicts in solar pannel technology is believable, there won't be enough energy around to build those panels. (I think we can agree that we will be able to build those panels without using much if any petrolium products in the basic materials except of course  the energy to produce those materials.)

The problem with P's energy argument is this. What if, instead of being able to provide all our energy with solar, we can only provide 1%. And what if we dedicate 5% of that new energy to making more solar panels? Even if we only compound it monthly it will take a bit les than 32 months to reach the 100% solar -supplied goal. Lets say half of that new energy is used in scaling up manufacturing, we are still looking at a 5 year project. If Kurzweil is anywhere near correct in his projections we just need to start 5 or 10 years before oil runs out; still quite possible in my opinion!

Kurzweil, Singularity, and Peak Oil (Oh My!)

Spinning off from my first entry at Da Stinct, I took a quick look at Ray Kurzweil and his thoughts on solar; an interesting cat no doubt.

 Well, we know he makes a damned fine electric piano, and as a futurist his predictions have been far better than most; nailing down the fall of the Soviet Union long before is was a glimmer in Ronnie's eye,predicting the explossion of the Internet was a pretty good call too.

 I suppose then Kurzweil is worth listening to.

  Here's Kurzweil on solar; "Here's what I mean: Today we produce 14 trillion (about 1013) watts of power, 78 percent of which comes from fossil fuels. We have, however, plenty of energy in our midst. About 1017 watts of sunlight fall on the earth, or roughly 10,000 times more energy than we regularly consume. Solar panels today do a poor job of capturing this energy because they are inefficient, expensive, heavy, and difficult to integrate with building materials. Today production of solar power costs on average $8 per watt, much more than other energy sources.

The economics of solar power are poised to change dramatically, however, as a new generation of solar panels made with nanomaterials comes of age. Developed by a series of venture-backed companies eagerly jockeying to disrupt that $1.9 trillion worldwide oil industry, these innovative panels are projected to drop in price within a few years. And whether or not any of the known businesses now developing them are successful, once we have full-scale molecular nanotechnology-based manufacturing, we'll be off to the races.

 At this point, energy will become an information technology dominated by massively parallel, computation-controlled molecular manufacturing processes. In 20 years, I believe solar panels will be as inexpensive as a penny per square meter. We will be able to place them on buildings and vehicles, build solar energy farms, and incorporate them into clothing for powering mobile devices. Converting 0.0003 percent of all sunlight hitting the earth, which will be feasible at that time, will let us meet 100 percent of our energy needs two decades from now. In yet another welcome change, we will be able to store the energy in nanoengineered fuel cells that will be tiny and widely distributed, a great improvement over the centralized, dangerous energy storage facilities we rely on today, such as liquid natural gas tanks."

 Speaking of worth listening to, I do think that we should be together, don't you?

 

If you want to see a bit more on Kurzweil's Law, check out this site with a brief and interesting explanation that includes "Spock's Chessboard"!

 For more on the "Singularity" drop in in to Wikipedia one more time.

Or watch Kurzweil speak (3 part episode) at YouTube.

I still think the law of unintended consequences will reamin in effect. If it only leads to Giant Gorrilas Clutching Volkswagen Beatles, I'll breathe a sigh of relief!