Rising Oil Prices: Are We Through Yet?

We've been blogging about oil prices a lot lately because we have known for some time (according to the data that the Fed itself said it was watching via FOMC Minutes and various Fed speeches) that inflationary pressures were steadily becoming a much bigger issue than the Fed was actually letting on to. We also knew that as long as oil prices kept rising, the Fed's growing inflation problem would just keep getting worse.

Earlier this month, our posts:

• "Rising Oil Prices: How Much Is Left In The Tank?" (May 12th), and
• "Rising Oil Prices Part 2: Seasonal Tendencies" (May 14th)

talked about how much higher oil prices were likely to go. At the time, crude oil was trading at all time highs at $125 per barrel, and a pretty big chunk of Wall Street was calling for prices to peak.

Our work showed different, however, as a combination of technical patterns and price action, investor sentiment, and inter-market relationships (the three components that comprise our research) all suggested that oil and energy prices were still headed higher.

Now, here we are, less than two weeks later, and crude oil prices have already risen by almost another 10 bucks a barrel (8%), the AMEX Oil Index (XOI) is 131 points (9%) higher, and the Energy Select SPDR (XLE) has risen by more than 7.00 points or 8%.

Now what?

In previous postings we have been referring to an April 17th Commentary that we did entitled Bullish Breakout In Energy Prices Means Inflationary Pressures Should Only Get Worse. In that report, we discussed new bullish breakouts in the Select SPDR Energy ETF (XLE), and coincident breakouts in six of the 13 largest Energy Sector components according to market cap.

Through the close on Thursday, three of those six Energy Sector components have already met their initial upside targets. One of them is Occidental Petroleum (OXY). The following is an excerpt and a chart from that April 17th report.

"Occidental Petroleum Corp (OXY) is the fifth largest component of the Energy Sector and comprises 4.51% of its market cap. The green highlights point out that OXY has just broken out of its own triangle pattern, just like those highlighted in the charts above. Once again, triangles indicate indecision and a pause within an existing trend, so yesterday's breakout tells us that the market has decided that the major uptrend in OXY is still valid and is resuming now. The initial upside target in OXY, according to the triangle pattern, is $100.00 per share, which would equate to a $16.81, 20% rise from Wednesday's closing price of $83.19."


Here's the updated chart, which shows that our $100 target has just been met.

Since counter-trend corrections often begin once initial price targets have been met, it is reasonable to assume that energy-related assets are susceptible to a near term decline from here. However, considering all factors from our April 17th report, and what has transpired since then, any decline from here appears more likely to be corrective rather than directional.

If this turns out to be the case, it should put increased pressure on the Fed to start fighting inflation sooner rather than later.