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Another Day, Another Five Dollars

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Another Day, Another Five Dollars

Just when the oil bears thought it was safe to come back into the market the head bull appeared to give them a ride on his horns. The president of OPEC became another in a long line of prognosticators to claim oil prices are not done climbing. Chakib Khelil said oil prices could hit $150 or even $170 this summer but did not think they would reach $200. That was all the bulls needed to stampede back into the market. The bears who loaded up on shorts again after the failed weekend meeting were squeezed unmercifully once again. Oil traded over $140 intraday and has now moved back over $140 in overnight trading.

You may recall my comments from Wednesday about the CFTC. They claimed earlier this week that speculators in energy futures had been "net short" since Feb-2007. That means there are more short positions held by speculators than long positions. On the surface that appears to kill the theory that speculators have been responsible for higher prices because most of them are betting on a correction. Unfortunately an over abundance of shorts nearly always produces a perfect scenario for higher prices.

Today's scenario was a perfect example. After trading in a range for three weeks around $137 the Wednesday drop to $132 looked like the beginning of a post meeting correction. Bears loaded up and settled in for the party. Unfortunately it was the bulls who crashed the party after Chakib Khelil increased the target for prices to $170 this summer. Summer only has nine weeks left. We already Morgan Stanley saying $150 by July 4th and Goldman Sachs saying $200 this year. Add in Khelil's $170 and the momentum players jumped on board again. Shorts were squeezed and prices soared. So, yes, speculators may be responsible but not by choice.

Short interest is a perfect fuel for momentum traders. We have seen it time and time again in hundreds of stocks. Google was a prime example after their IPO. The giant gains over a very short period caused every armchair chart technician to pronounce Google overextended. Everybody loaded up on shorts at $120, then $140 and again at $200. At $200 the overvalued, too far too fast, never meet their earnings, etc, etc, excuses were flying. More shorts again after being blown out over and over. The rest of the story is history. The shorts kept trying all the way to $750 and the bulls kept charging.

Oil is just like that today. Short interest is very high and there are almost daily news events to apply fuel to the fire. Since oil has never been this high before and OPEC is so steadfast in their claims of adequate supply the bears are convinced this is the top. Just like they thought $100, $120 and $130 were tops several months ago. As long as OPEC keeps talking the talk the shorts are going to keep walking the walk and getting run over at every crosswalk.

OPEC's president was not the only news item pushing prices higher. Not to be outdone the head of Russian energy giant Gazprom reiterated his prediction of $250 oil. He criticized OPEC saying they were unable to control prices as in the past and they had not made a single decision of late that could really influence the oil market. He said the current rally in oil "will end with prices at a radically new level." That was good for another round of buying and additional pain for the shorts.

Friday could be a capitulation day for some. With the holiday week approaching those still betting on a correction may bite the bullet and cover those positions. With $139 strong resistance for the last three weeks a breakout there could trigger an avalanche of short covering. We could easily see another record day of gains.

Jim Brown

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