Crude blasting toward $100 a barrel

Analysis: A very rare combination of market factors is in the works. Fortunately, playing this move is really easy.

By TheStreet Staff Dec 8, 2010 1:14PM

Oil © Scott Gibson/CorbisBy Daniel Dicker, TheStreet


Oil is looking like an unstoppable beast, recently trading above $90 a barrel. But there are three market factors telling me that this move is not temporary and will set the stage for a powerful follow-though, sending oil above $100 a barrel by the second quarter of 2011.


Now is the time to buy integrated oil stocks, still the best proxy for crude prices, despite how far many of them have run already in the past two months.


One rare market factor convincing me of the strength of this move is the action of the European Brent crude benchmark. While Brent is a sweet grade of crude, like the U.S. benchmark West Texas Intermediate, it normally trades at a discount to its American counterpart.


But during this rally, Brent has maintained a strong premium to WTI, reaching a pretty steep $2.50 recently. This, in and of itself, is not all that unusual, but combined with fears of European growth difficulties, it is rare to see this move being led by the European market. It points to a general market move of rare and incredible strength.

Another very rare disconnect that is pointing to higher prices is how the dollar-oil trade has come apart so completely recently. With a dollar-denominated asset like oil, we normally see the dollar move in opposite directions to crude, and this has mostly been the case.


But in the past two weeks, the dollar has managed an impressive rally while being unable to staunch oil's uptick much, if any. Since Nov. 17, oil has rallied more than 10%, while the dollar has also marginally improved, up almost 5%. This isn't supposed to happen. It is clear that the oil move is entirely too strong to be deterred, even by a rallying greenback.


Finally, there is an historic flattening of the crude curve that is going on. Since 2008, oil has labored under a very difficult contango market, in which the months for prompt delivery of crude have traded at deep discounts to months in the very back.


But in the past several weeks, these spreads between months have been shrinking slowly and now look poised to actually turn around and flip. This is a rare but very powerful event we haven't seen in the crude market since 2007, when oil rallied from $50 to more than $90 a barrel on its way in 2008 to an acrophobic $147 that summer. That's telling me just how strong this crude rally is.


It's rare when you see one or two trading indicators that will telegraph an impending move or a continued move in oil. But when you see three, it's almost scary. That's what I'm seeing now, and it looks like $100 crude is imminent.


Playing this move couldn't be easier. Integrated oil stocks have historically been the best proxies for an increasing price of the crude barrel.


Despite the fact that the biggest of these -- ExxonMobil (XOM), Conoco-Phillips (COP) and Chevron (CVX) -- have been reaching 52-week highs, a continued rally in oil prices should translate into further gains for these issues.


And they're relatively safe ways to play the move, too, as opposed to getting involved in futures markets or, UGH, the oil ETF's like United States Oil Fund (USO) or the iPath oil index (OIL) -- the worst investments in the world.


A continued move up for oil seems to be coming. Position yourself correctly for 2011 with solid, safe and dependable integrated oil stocks.


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