Chris Lau - Seeking Alpha

Wednesday, September 03, 2008

Have Oil Prices Finally Popped?

The business section of newspapers will be littered with speculation that the oil bubble has popped, along with the commodities market in general. North of the border, the S&P/TSX Composite index fell 470 points, or 3%. Is that a whopping number?

The commodities market will be in a tug of war between speculation of a widespread slowdown in global growth, and a recovery in the U.S. markets. Since commodity prices will be affected largely by demand from China and India, one cannot exclude the U.S. accounts for a large level of demand from these very countries.

In short, economic figures for China and India are limited, and investors only have their stock market indices as an unreliable guide (both are down substantially for 2008).

Going back to energy prices, let's take a look at OIH:

Negative technical divergence occurred moving into March 2008. Upon sell-off, the stock rebounded from support levels at around $165 (marked L on the chart). The rally to new highs ended with another sell-off on stronger volume, a bearish sign.

Between July and August, support held strong. The stock is currently below the support price and has broken its upward support line. This does not provide conclusive evidence that the oil bubble has popped. Expect volatility as oil struggles to fight to the support line @ $185.

Think of fundamentals as well: world growth might be slowing but not so much that demand is being impacted. Solar energy is today's market darling, but there is not enough of it as an energy source to dent demand for oil. Finally, the auto market is just starting to develop more small, energy-efficient vehicles.

The downside for OIH (and oil) is 8.5% at best.