Oil Price & Oil Stocks

Since global economic recovery took hold in mid - 2009, the basic trend of the oil price has
risen +12% per year and the "normal" high / low range has been about  $20 bl on WTIC. The
current range is about $98 - 118. The market has been well supplied this year, so the oil
price has been rising comparatively gently until the crisis in Iraq caught the news. The oil
price is winding up a period of seasonal weakness and the Iraqi situation may have kept the
crude price above $100 bl in June. WTIC Weekly

Holding Iraq aside, it would be fair to see oil reach a bit above $120 at its seasonal peak based
on past experience, but since the price has had a relatively mild and stable advance so far in
2014, my $120 projection for this autumn looks a bit suspect, and it make take production
disturbances in Iraq to bring oil up to the $120 level.

Even if production disruptions in Iraq over the next 12 months are minimal, industry experts
are counting on Iraq to produce an extra 3-4 million bd over the long term, so unless there is
a relatively peaceable political reconciliation there, traders may add a premium to the price
of crude to account for the risk of a major production growth shortfall should Iraq remain
unstable or even dissolve into separate political entities. The risk of a production shut down
in southern Iraq's major southern fields now appears remote given the activation of a very
large group of Shia militias from Baghdad on south to Basra and the presence of US attack
aircraft in the region. In the current fluid situation, The US must first protect Its large
embassy in Baghdad, but since an unlikely run by ISIS down to Basra could trigger a large
increase in the price of crude, the US, however reluctantly, might launch air strikes down
in the region.

The relative strength of the oil group against the SPX is shown in the bottom panel of the chart.
As expected this large out of favor group has experienced a positive reversal of fortune on
expectations that stronger global economic growth coupled with low spare capacity at the
wellhead would be a a nice plus for relative performance. In addition, continuing price
recovery in natural gas is helping along.The RS line for the XOI is coming up on resistance
at .90, and may falter without further positive crude price momentum in the months ahead.