Oil Market & Sector

The peak driving season is well underway in the US, and
afterward, in the autumn will come the heating oil season.
In keeping, oil has entered a period of seasonal strength
which can run late into autumn. The oil price bulls are
out in force and the stocks are drawing more enthusiastic
support from analysts and pundits. There's the hurricane
season to worry over and, just to make it interesting,
the heavies on the Security Council have asked Iran to
respond to their proffered basket of goodies vs. sanctions
proposal re Iran's nuclear fuels program by July 5.

The hurricane season is a case of que sera sera. Iran
reacted positively to the goodies, but has been stalling
on responding, so the first pressure point there in a while
comes up this next Wed. the 5th.

This seasonal period for oil may be interesting not only for
issues that may affect supply, but demand as well, as an
uptrending price may, at some point, trigger much more
vigorous conservation efforts which could well come on top of
slower global economic growth. Demand for oil has been
taken as relatively inelastic. Nothing could be further from
the truth. Folks everywhere now know that the real price of
oil has jumped and shows no sign of receding. So, if you are
long the oils and the service companies keep the demand side
of the equation in firm view.

Investment managers tend to sell decelerating earnings
growth. Since oil stock earnings are very leveraged to
price, oil not only needs to rise in price this season, it needs
to rise a lot, say to $80 - 85 a bl. by late 2006 to keep the
yr/yr earnings momentum of the oil stocks at a high enough
level to maintain solid outperformance relative to the broad
stock market. That's another good strategic reason for you to
watch how demand responds to price.

To stay in the powerful uptrend underway since mid-2003, the oil
price needs to stay above $68 a bl. in the month ahead.

Now, a couple of charts. The first is a daily for WTI crude. Sure
enough, the bulls have kicked off the season. Note the nice upturn
of MACD, but note as well that the price is approaching a short
term overbought and important resistance. Click now.
The second chart is a weekly of WTI. The top panel shows the
52 week price momentum.