Update of the AMEX Oil Index

By: David Petch | Sun, Jan 29, 2006
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The following is a commentary that appeared at Treasure Chests January 22, 2006.

Interesting tidbits of information flying around the web the past week. To start Kuwait may have to cut their reserve estimates by half, Iran is threatening to withhold oil on the open market, China is still clamoring over the US in attempt to secure as much oil as possible, rebels in Nigeria attacking oil platforms and kidnapping people etc. etc. This kind of behaviour for North Americans is going to quickly suggest that there is no place like home. As such, hefty premiums will be put on oil sand companies and other oil companies with the vast majority of their holdings in North America. Canada is a stable country, with bickering between all the provinces. There is no internal terrorist activity of public bombings in Canada, usually only shootings between wars on drug territory etc. etc. (much like any other area). As the Elliott Wave count suggests, the XOI is still in a correction. If this is an incredibly powerful bull market though, some technicals just do not matter. The basic premise of investing in bull markets is to hold core positions throughout and add on weakness.

I think that around 2010, it will be time to take chips off the table and invest in gold bullion, because most currencies will become null and void due to the huge amounts of debt. All of the money to be made in the next 4 years will need to find a home, so where to put it? If gold is unavailable, buying huge tracts of farmland near power generation plants with accessible water will be of importance. I think keeping 10-15% of money tied up in stock after 2010 will be smart, just to balance out the portfolio. When oil supplies really tighten up, there will be gas siphoned from cars, etc.etc. People fail to realize that huge amounts of oil are required to keep the food supply going. More oil will drive the price of food to levels people thought were not possible, restaurants will become soup kitchens for those fortunate enough to get stuff in their belly. It is important to make money in the next 4 years, and have it properly diversified, keeping gold and silver in 3-5 locations in case of a robbery or such (good luck with insurance claims in the future).

Canada is smart by having multiple foreign countries participate in the oil sharing, because if the US, China, France, India etc. wanted it for themselves, there would be a big battle. As such I think Canada should develop its own nuclear program to keep its own borders safe. Sad to say, but a country with a nuclear shield offers supreme protection to those that do not. Lets hope that human kind can share in the resources and develop a peaceful means of solving our up and coming energy crisis.

To prepare, plan on not owning a car, people with them in 6-10 years will be viewed as targets, cut back on non-essential items, learn to eat less red meat and eat more fruits, vegetables. Learn how to cook, darn socks etc. The price of oil is $69.00/barrel as I type and it the first month of 2006 is not over yet. Just imagine what will happen as the global tensions ignite, rather than the sparks that are just flying right now. I think $90-100/barrel oil is possible this year, if things go bad with Iran, Nigeria or Saudi Arabia. Gas in Canada should shoot up from 0.95 cents/liter to 2.00/liter in no time flat. One thing I would suggest is to buy some spare gas containers and keep them filled up on a regular basis. If gas shortages occur and massive line-ups at the pump happen, then at least there will be a supply. It will be important to conserve gas by only taking necessary trips and using public transit systems as much as possible. I will update the HUI tomorrow night. One more thing, 60 minutes had a presentation on the Canadian oil sands tonight, so expect CanWest Petroleum to hit $5.00/share by the end of the week, $6/share if there is a buying frenzy. I had a target of $6-7/share on CWPC by the end of 2006 and I honestly think those levels will be hit by June 2006 at the latest. Once people realize what peak oil is and where the only stable supplies are, think the Internet multiplied by a factor of 3. Countries can not live without oil. A society of the future can still be technologically driven, but not with the amount of energy currently expended. Stand pat on your energy investments and wait for the major nationals to buy out smaller stocks for huge buyout prices. Here is a 4-year price target on CWPC, pending all three paleochannels on their Firebag East property come through. I think they will find 15-20 billion barrels of oil, with three separate SAGD plants. Saskatchewan has huge Uranium reserves, so powering SAGD plants likely will come from nuclear reactors. CWPC will likely have 400 million shares in 4 years, with 1 stock split likely from that. The share price I think will range from $60/share to $200/share. Remember, this is i) IF THEY ARE NOT BOUGHT OUT, ii) 15-20 billion barrels of oil are found. I am not usually one to think pie in the sky, but given the recent developments of the stability of oil from other parts of the world, hurricanes knocking out natural gas and oil supplies from the US, there will be a hefty premium for unconventional sources of oil in politically stable countries. I am sure many of you will be able to retire well in 4 years, with difficulty of trying to figure out how to preserve all the paper money generated. Ok, enough chatter for now and on to the analysis.

The Bollinger bands are all above the current XOI price, with the 55 MA BB higher than the 34 MA BB. This is suggestive the mid-term trend is in-between the longer-term and shorter-term trends. This translates into the XOI continuing to move higher, rather than correct. The lower 21 and 34 MA Bollinger bands recently curled up, suggestive a top is near. The short-term stochastics recently had the %K break out of a contracting wedge in place from June of 2005. Currently, the %K is in close proximity to the %D and appeared to curl down. However, given the 60 Minutes piece, the global tension news this weekend and higher oil prices one must conclude the XOI is going to be higher this week. Some derivatives exposure for energy companies hedging could occur, leaving them like Enron, so do not invest in companies that hedge their commodity. I suspect the %K will move higher, allowing for the XOI to continue rallying until mid-February. I think the turning point in the markets will be around February to March. If the HUI and XOI put in tops around mid February/early March, the corrections could last 6-8 months. The XOI correction is discussed in Figures 4 and 5.

Figure 1

Red lines on the right hand side of the chart represent Fibonacci price projections based upon upward moving wave segments projected off of their subsequent lows. Areas of line overlap represent Fib clusters, which are important support/resistance levels. The 1088 level was a strong Fib resistance level, now Fib support. The next hurdle is 1150, near the target I have for the current wave up. Wave [3] in the XOI could be underway and core positions should be held, however, Figure 3 shows one point to suggest the correction is still underway even though a higher high is going to finish this wave up. The thick lines are important to illustrate how things will develop in the coming months, as the wave structure will dance between them like magic. The moving averages are in bullish alignment (50 day MA above the 155 day MA above the 200 day MA), in fact the 200 day MA has not come anywhere near the 50 day MA since the start of the XOI bull market move in 2003. This is a true sign of a strong bull market. The full stochastics have the %K above the %D, recently breaking out of a contracting wedge structure developing since June 2005. There is no sign of the %K crossing beneath the %D and extrapolation of the current trend suggests a top in late February/early March. Best to stay long and strong with the oil stocks. The prices of CWPC and other oil stocks may seem ridiculous in a few years and make one think it is time to take profits; simply remember there is no more oil being made within our current life times and there is a premium built into the oil being in a secure country. When selling stocks to the investing public in 2009/2010, simply remember that there can only be so many people that make money in a bull market, so take profits then, be humble about it and hide your wealth. That will be something in the future that will be common, rather than trying to keep up with the Jones, it will be dressing down with the McKoys. Wealth in the next 4-6 years will be a revered thing and an image of being common, poor and down and out will not draw any unsuspecting attention.

Figure 2

The weekly XOI is shown below, with Fibonacci time projections of wave [1] shown near the middle of the chart and Fib price projections of the move shown in red on the right hand side. The next Fib time point is June 9, 2006 and then March 23, 2007. If the HUI were to make a move to 1285 (1:1 relationship with wave [1]), I would have to conclude wave [3] of the XOI was underway, with a move I think that will carry it to 1800-2000. Notice the lower 55 MA Bollinger band, currently with a value of 662 (up from last week's value of 655). At the current rate of rise/week for this BB setting, it would take until March 2007 to reach current XOI values. As I have stated earlier, the peak oil situation is going to compress the commodity cycle to have it finish around 2010-2013, rather than 2015-2018. Peak oil will likely involve a year over year decline of around 10%. Every year that goes forward, there is 10% less oil to go around, compounded. So, if peak oil hits around 2007/2008, then there will be 50% less oil in 7.2 years, or 2014-2016. Many people will simply starve due to the shortage of oil for producing food. So, right now in good ol' 2006, the time lines for making money and having enough to keep a family going along with or without a job will be critical. The stochastics have the %K above the %D within an expanding wedge pattern, with 4-6 weeks of upside remaining before a top is put in. All three charts, especially this one paint a bullish case for the XOI over the coming 4-6 weeks. Oh yah, one more thing, governments will be strapped for cash after 2009 and will be trying to get as much out of those with money as possible. This will be one reason to dump paper stocks and simply own physical gold and silver bullion: it will not be traceable and wealth will be preserved. If the government bans owning gold and silver, simply take it to a jeweler and convert it all to jewelry (as much as possible). The Babson channel (a channel containing 38.2%, 50% and 61.8% channel retracements) shows the steep slope the XOI has developed since the start of its bull market move. If it continues developing as seen below, then the 2000 level could be hit by 2008 with a subsequent correction and then the public jumping on board.

Figure 3

The mid-term Elliott Wave count of the XOI is shown below. The move in wave (X) only has two impulsive segments by my count, which is why I have this wave [2] classified as a running correction. Wave AorW ended one month ago and the move up since has been nearly straight up. I do not feel comfortable labeling the internal wave structure any lower than wave BorX, because it does appear to be corrective but at the same time be the setup for an impulsive structure. There are numerous ways to try labeling it and I would hazard a guess that anyone's would be just as valid as the next. IF trading this, play the lower trend line to suggest the move is over. If wave (Y) is developing into a non-limiting triangle, then wave [2] would not be over until late this year. I think however, that things are going to be heating up in the commodity world with oil prices so things that normally would occur will have their time horizons compacted. Keep an open mind as we continue this journey as a whole, because some technicals may seem weird for having trends continue when they are overbought or oversold. Remember this, commodity prices were suppressed for 23 years, so an overbought condition must be kept within the perspective that a higher Degree setting of overbought should be examined.

Figure 4

The long-term Elliott Wave count of the XOI is shown below. Wave [1] was started higher than the absolute bottom (Orthodox low), because the impulsive wave structure to follow fitted the count. I originally had wave (X) as wave (5).[1], but was forced to change my views when there clearly was only two impulsive waves in that move (a zigzag 5-3-5). Wave (3).[1] was extended in complexity and time, but not price. Two out of three of the extensions mentioned last week are required for a true impulsive structure to exist, otherwise it is part of a corrective structure. How accurate is this count? I would classify this count as being 95% accurate up until wave AorW.[2]. The current move up could be the start of wave [3] in the XOI, but the lowly position of the 55 week MA Bollinger band from Figure 3 makes me think the pattern is corrective (as per the wave structure shown in Figure 4). A heavy area of line overlap with multiple trend line touch points is generally indicative of a corrective pattern. I think weakness in the overall stock market will bear down on commodity stocks for 4-6 months, only to rally when people finally begin to see that the problems with oil supplies are not going to disappear any time soon.

Figure 5

I could have updated the HUI tonight, but felt the energy issue should be touched upon due to all the IN-YOUR FACE type of news over the past few days. The HUI will be up this week. More and more people will begin converting money to gold and soon gold will be all but impossible to pick up, except at much higher prices. A balance should be had with 5-10% of net wealth stuck in bullion and other amounts (besides a home) invested in commodity stocks. Trying to play the S&P or the broad markets should currently be viewed as mental gymnastics. It is more productive and financially lucrative to concentrate on what gold, silver and energy companies to buy rather than finding some small stocks to short. There will be a time to short gold stocks and energy stocks after they have gone to the moon in price, but that time is not now and likely will not occur until 5-7 years from now. A prior piece I did on energy had the year 2013 as the turning point for when energy would become very scarce. If people reading this live in Canada, get a geothermal unit while the prices are still affordable and the demand is not that high. Over the next 2 years, geothermal companies are going to be very busy. The prices are generally $20,000, but most of that can be through a government sponsored loan and the energy use is 70% less that natural gas or electric furnaces. The interest and principal payments should equate to lower than current expenditures and will only be cheaper in the coming years when natural gas levels for North America fall off a cliff.

Back tomorrow night with an update on the AMEX Gold BUGS Index, which should be up tomorrow.


 

David Petch

Author: David Petch

David Petch
TreasureChests.info

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth; please visit our web site at http://www.treasurechests.info.

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