When a commodity or stock breaks out to new highs, as oil has done again this week, it’s extremely unwise to go short, as many are suggesting. I have no doubt, of course, that now I’ve said that in print, it will mark the top of the market.

But from a technical analysis point of view, there is no longer any overhead resistance - nothing to stand in the way – and the price can go anywhere. But where?

We saw exactly the same thing with uranium last year, we saw it with wheat, corn and soybeans this year; we saw it with copper, lead, zinc and nickel, we’ve just seen it with rice; we saw it with UK housing; we saw it to an extent with gold, though that one didn’t run wild; we’re seeing it with coal and iron ore; and we’re starting to see it with food.

In these inflationary times, it’s going to be a recurring vision, so better get used to it. But just how far is the oil price going to go?

Why this won’t be the highest point for oil in the long term

Oil is now well and truly at unheard-of levels, even adjusting for inflation. However, to those bears who are calling the top, I’m not saying that looking for a short-term shorting opportunity is unwise. But you shouldn’t expect this to be the highest point that oil hits in the longer term.

I accept that there are a lot of people, especially bankrupt and unpopular Western governments, who have a major vested interest in getting the oil price down, so you can rest assured there will be all sorts of shenanigans behind the scenes applying downward pressure. However, the power of these institutions both at home and abroad is waning.

Another bear point is that there seems to be a bit of resistance here at $125, and it’s a nice round number for an intermediate top. Then there’s the fact that oil often tops out in March and, if it doesn’t do that, then May will be the month of choice.

But, as we saw in my article a few weeks back (see here: Will oil hit $160 a barrel next week?, there is a supply squeeze. Hats off to ‘Zapata’ George for calling it. We are on course for his $160 a barrel. Yes, there are lots of speculators in this market, but much of this price is genuine demand in the face of decreasing or unchanging supply.

What’s more, all these speculators are doing in real terms is hedging their cash against inflation. Is that so bad?

The price may decrease, but Peak Oil is yet to strike

As soon as people say, ‘it’s different this time’, you can be sure the top will be in within a few weeks. But, when Peak Oil – the point at which we are getting as much oil out of the ground as we ever will - strikes, it really will be different this time. Is Peak Oil kicking in now? I would say fears of Peak Oil have certainly been pushing the price up for some five years or more.

I do expect something will happen over the coming few weeks, some piece of news that will serve to knock the price down. Some deal might be agreed in Iraq; an index might be re-jigged again or a technological breakthrough be announced; perhaps a week will go buy without an attack on a pipeline in Nigeria.

But it won’t knock the price down far.

Oil demand will not decrease by anything significant, nor will supply increase. Oil is in a long-term bull market. The best way to play it has been to buy and hold. Most of those who have tried to be clever and trade it could have better spent their time playing Frisbee on the beach.

The secret has been finding the right entry points and that, my friends, has been when oil retreats to the 52-week moving average – its average price over the last year. That average is at around $90 now. Will we ever get back down there? At the moment it feels like we’ll never see double-digit oil again.

We are a long way above that average now. So much so, that you could say oil was a sell – in the short-term at least.

But in the long-term, oil will go a lot higher. So high you are going to think twice about driving every time you get in your Maserati (the one you bought with the proceeds of your oil investments). In the intermediate term we need to consolidate these higher prices. If it goes much higher from here, it will be on a spike and most likely come back down again.

How to put some oil in your portfolio

When I pointed out last week how oil has dramatically outperformed oil stocks, a lot of people wrote in and asked how to buy oil. Well, you need a broker who sells futures; you can spreadbet it; or you can buy CFDs. I would not recommend any of these if you are not experienced. A simpler option is the US-listed US Oil Fund ETF (USO). ETF Securities also has various oil ETFs listed here.

Turning to the wider markets…

The FTSE 100 fell 8 points at 6,211 as surging inflation – which rose to 3% (see here for more: UK inflation – why interest rates will stay frozen for now) hit hopes for a rate cut.

Across the Channel yesterday, the Paris CAC-40 gained 22 points to end the day at 4,998. And in Frankfurt, the DAX-30 rose 24 points to 7,060.

On Wall Street, US stocks fell back. The Dow Jones shed 44 points to end at 12,832. The broader S&P 500 was flat at 1,403, while the tech-heavy Nasdaq rose 6 point to close at 2,495 on rumours that activist investor Carl Icahn had bought a significant stake in Yahoo.

In Asia this morning, Japanese stocks made gains, as the country’s largest telephone operator, Nippon Telegraph & Telephone Co, raised its dividend by more than 20%, and Astellas Pharma announced a $381m share buyback. The Nikkei 225 rose 161 points to 14,115.

Crude oil was trading at $125.58 in New York. Meanwhile Brent spot was trading at $122.63.

Spot gold was trading at around $863 an ounce this morning, while silver was trading at $16.58. Platinum traded around $2,037.

Turning to forex, sterling was trading at 1.9411 against the dollar, and at 1.2591 against the euro. The dollar was last trading at 0.6488 against the euro and 105.10 against the Japanese yen.

This morning, Bradford & Bingley has announced an emergency rights issue. The group will sell another £300m in shares to shore up its capital base. It’s a major U-turn for the bank, which just three weeks ago angrily denied reports it was planning such an issue. Of course, it’s not the first UK bank to deny problems, then raise capital later – both HBoS and Royal Bank of Scotland have taken a broadly similar approach to fund raising. We wonder who’ll be next.

Source:Oil: Why It’s Different this Time