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Get Four
|  | JULY 22, 2004
Oil Prices: Ready to Sputter? Technical analyst Jack Adkins figures crude will soon plunge, maybe to $28 a barrel. One reason: The "risk premium" is too high Where are crude-oil prices headed? If you ask some experts who follow energy-market fundamentals, they'll tell you that they have room to move even higher. But technical analyst Jack Adkins, director of quantitative strategy in North America for Action Economics, has a different view. He thinks charts that track price patterns for crude show that oil prices are about to fall precipitously. Adkins predicts that oil, which now trades just shy of $41 a barrel, will rise a bit further, perhaps as high as $43, topping its all-time high of $42.45 set on June 2, only to then collapse. This time he thinks it will drop back as low as $28. He thinks the answer lies in the pattern shown on the charts and other tools, especially an analytical technique known as the Bollinger Bands. Of course, some detractors of technical analysis think reading price charts to predict future changes isn't far removed from examining tea leaves. In the oil market, they prefer to look to the real world and its news events and production and usage trends. But Adkins can claim some recent success, as his approach correctly predicted a drop in prices in May. Adkins recently spoke with Carol Vinzant, editor of BusinessWeek's Stock Trader e-mail newsletter, about his expectations for crude-oil prices and how he interprets the charts to arrive at his forecasts. Edited excerpts from their conversation follow: Q: What made you predict the price would fall this spring? A: We had $43.80 [per barrel] as the high-limit projection [in Action's May report] and it came up just shy of that. I used more or less the same analytics I'm using now. Part of the scheme is relative value to the CRB, the Commodity Research Bureau index [a composite index of various commodity prices]. And we anticipated higher output from OPEC before their [June 3] meeting actually occurred, and they said they would boost production. Q: What makes you think oil prices are going to fall now? A:The oil producers are selling into the rally and locking into the high prices. The dominant player in the market has been the hedge funds. They're betting that there's going to be a disruption in supply and that there's no room [in the market] for supply disruption. I think that negative events are built into the market, and if the risk premium doesn't need to materialize, hedge funds will need to cover the positions [sell because the price is dropping]. If prices do begin to fall, it will trigger more aggressive selling, and they'll empty their positions. My contention is that a lot of that stuff is baked into the cake, and if it [a terrorist attack or other disruptive event] doesn't happen, prices are too high. Q: You mention in your report that you think the "risk premium," what the market has added to the price of oil fearing a terrorist attack that hits oil supply lines or other geopolitical events, is about $5 to $8 a barrel. You think that's too high? A: The market perceives there's no room for any kind of supply disruption. If the Russian government decides to take over Yukos (YKOCF.PK ), the feeling is that production would not be as robust under a government-run company. Plus, the government here [in the U.S.] keeps issuing these more or less vague terror warnings, and that keep the risk premium in place. The premium is so high, at $5 to $8 a barrel, that [the current high price] is a fragile thing to hang your hat on if you're bullish. Q: So that means that even if there's a big terrorist attack, you would not expect oil prices to go up, because the possibility is already built into the current price? A: It depends on the event. Rather than have a $5 to $8 jump if something did happen, it's built-in. If something catastrophic in terms of supply were to occur, I don't think there'll be that much of a reaction. You might get 50 cents, you might get as a much as a dollar. I don't think a catastrophic supply disruption is worth more than 50 cents or a dollar. Q: What do the price patterns show? A: It's a double top [a chart pattern of two peaks, followed by a decline]. That's the pattern that's developing, in my view. What is, in my opinion, most likely is that we're going to retest the early June high of $42.45. It could possibly marginally exceed that, and $43 would be kind of a top end. It might go a little above $43. Then we would have two highs a couple months apart, and prices would be expected to back off. That is the classic double-top pattern. Typically speaking, it's a relatively reliable pattern, especially at the extremes. And lately, it has been much more difficult for the price to get from $41 to $42 than it was to get from $35 [where it dropped in June] to $41. That's increasing my confidence. The market is laboring to make upticks.
BW MALL
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