Thursday, October 15, 2009

Option Bets on $100 Oil by Year-End Jump 10%

That is this evenings headlines from Bloomberg. Bloomberg.com. I believe Goldman Sachs had a year-
end target of $85. That seems more plausible. The pricing model, that I am looking at, shows targets of
$81 and $84-$85 by end of Oct and first half of November. Here is the chart that also illustrates a fairly
accurate 54 day high to high cycle that comes due around Nov 10.

The time cycle is self-explanatory. Let us breakdown the pricing model which correlates the Sept 25 rally
with the July 13 rally. The July 13 rally had two legs to it. The first half of that rally exhausted on the
August 7 NFP report, much like equities did. It sold off into Aug 17, just like equities did. Then it rallied
into the Aug 25 consumer confidence report just like equities did. Then crude oil and equities began to
diverge, for about a month, and they crude oil rejoined the stock market party following Sept 25. So, the
first half of the pricing model targets $81 for crude oil by Oct 23. The rally thus far off the Sept 25 low in
crude oil is strongly correlated to the first half of the pricing model off the July 13 low. But, what if the
1
equities take a much deserved pause after this week’s climactic earnings season and economic reports?
Might crude oil prices also consider a pause?

In short, anything that would disrupt the upside momentum in equities short term could disrupt the
momentum pushing crude oil to $81 by end of next week which is Oct 23. The second half of the model
keeps crude oil prices chugging higher into Nov 10-ish targeting $84-$85. Notably, the rate of change off
the Sept 25 low will have to slow if all crude oil is going to see is $84-$85 by mid-November. Either way,
it looks like we will have to watch this active 54 day cycle for a potential change or pause in trend.

The weekly chart shows that crude oil double topped in Nov-Dec 2007 at 99-100. But here is the catch:
the rally off the July 09 low shows external 1.41 and 1.62 retracement targets at 81 and 85. Notably, if we
look back to the August 2007 rally to 99-100 by year end as a pricing analog to the July 2009 rally, we’d
only expect crude oil to reach $85 by end of Nov and beginning of December. Anything is possible, but
there are some big stops at 81 and 85 above the July 2006 high at 78.40