After a lengthy pause after sending the "channel buster" exhaustion a month ago, crude oil has finally dipped down closer to its 30-week moving average and to the lower boundary of the trading channel we looked at in the previous crude oil commentary. Oil declined to a recent low this week as supply-related concerns come to the forefront.
In last month's commentary we looked at the possibility of a test of the $56-$58 area lower channel boundary before the latest correction ends, and I added that I'd be disappointed if oil didn't at least dip down to the $60 level. Crude is getting closer to that level and it's between the $58.60 and $60 area that the important 30-week moving average intersects and has acted as a buffer against further declines in the past.
Check out the latest rendering of the crude oil daily chart below. The blue line intersecting $58-$59 is the 30-week (150-day) moving average where initial support is expected. Notice that the crude price has been grunting under the weight of a parabolic dome, which has guided oil lower in recent weeks. Note the price peak above $70 from late August/early September (circled area), which was the "channel buster" we first discussed back in August. What is significant about this is that the peak, or "vertex," of said dome was to the right-of-center of the parabola. This usually means the dome will expire before price falls below the half-way point (which is at approximately $58-$59).
Speaking of supply concerns, it's interesting to hear ExxonMobil's president recent remarks concerning the estimated 7 trillion barrels of oil that Exxon geologists claim have yet to be discovered. He and the oil minister of Saudi Arabia also said the worldwide supply of oil is much greater than most now believe. The Saudis are also apparently expecting to double their reserve estimate. How quickly things change. The talk up until about a month ago was "peak oil" and falling reserves. Does it not seem obvious that those in charge of disseminating information will always "talk up the trend" by coming up with supply/demand explanations that seem to explain the prevailing trend? When oil is trending higher, it's because of "peak oil." When oil is declining for more than four weeks, it's because the reserves are "much greater than we thought." This is not to argue in favor of either side of the debate - it's just meant to point out the nature of how propaganda works in favor of the market manipulators in whatever direction they happen to be heading.
One reason for the persistence of the rising oil trend since the 2002-2003 Fed reflation has been to act as a "stealth tax" to keep the inflation from going to undesirable extremes. It has also assured that the average American doesn't enjoy any lasting benefits from the 2003 reflationary/recovery as whatever temporary benefits were accrued from the initial reflation has now been lost to a large degree in the form of increased taxation (and I use the term loosely) in one form or another.
I can't help but remember the lectures of the great Dr. Stuart Crane on this subject. Crane defined a tax as "Any taking of the production of a person's efforts by any act of a political institution." And certainly we must include the Federal Reserve and collusion among multinational oligopolies with close ties to government (such as the oil industry) as "political institutions."
Dr. Crane contended that as far back as 1983 the total tax take in the U.S. exceeded one-half of the income of every single producing person in the country. These include license fees, excise taxes, surtaxes, federal taxes, and monetary inflationary/reflationary efforts (since sustained inflation is effectively a stealth tax). The rising cost of fuel and energy must also be counted as a stealth tax in this discussion. Dr. Crane often drew attention to the favored game of governments of increasing the money supply and then taking it away from the people through taxation. "The power to tax is the power to regulate," he said. He also observed, "Inflation is a precursor to speculation, and then taxation."
What are the outer limits of the price of oil above $60/barrel for months at a time? We're about to find out whether or not the economy can bear it. My best guestimate is that the persistence of climbing fuel prices up until now should gradually be felt as a slowing in the economy as we head into 2006, especially in the wake of this year's 6-year cycle peak and next year's 8-year cycle bottom.
