Is Oil running out of fuel?
The last few months, oil prices have been like a car driving on a one-way street. They’ve just been getting higher and higher. The market seems to be fully accepting the fact that oil will reach USD 100, a target that has been discussed for months. The continuing of the rally has since, been projected to new highs with targets set for USD 120 or even 150. Oil could continue to new highs and why not reach these new targets. The if’s don’t seem to be the question, but the when’s. 
Are we seeing this rally continuing unchecked or are there some clouds on the horizon?
Prices usually never go on and on in a straight line. They tend to pull back on a regular basis while the market is gathering strength for a further push-up. This last rally has been quite aggressive when it comes to increases and time, making it vulnerable for a correction. The December 2007 Light Crude Oil contract (CLX07) has made around USD 44,000 per contract since the low of the last correction in January 2007. This is the largest move the oil has made since the low of around USD 10.35 in December 1998, when the present bull market took off. From that standpoint we’re bound for a correction soon.
But how do we know when or if the correction is underway? Price charts can give us a clue of imminent price changes and when looking at the daily chart for the December 2007 contract, we can see some indications of a price reversal. The Slow Stochastic indicator (SSTO) gives us an indication of market strength. When the indicator is above the 80% level, the market is in an overbought state. There is no fixed timeframe for how long the market can stay above the 80% level, it could stay there for weeks. The formation of the indicator can, on the other hand, give us some idea about the possible reversal. When a line drawn between the tops of the indicator show lower highs, and the prices show higher highs at the same time, the market is loosing momentum to maintain the upward movement and a reversal can be expected. Such a divergence between the price movement and the SSTO can be seen in the oil market today. The SSTO has not reached the high of middle of September, while the 
oil prices have shown a dramatic increase. According to the SSTO we should therefore be seeing a reversal or a correction soon.
If we get a reversal, how far or big will it be. The usual estimate of 50% is what most technical analysts would point at, and that’s not to far fetched. Quite often the reversals hit the 50% level when considering the run from the last reversal. For a possible shorter reversal, a use of the Fibonacci retracement theory can be practical. According to the Fibonacci theory, prices will hit possible reversal points at 23.6 and 38.2 percent before hitting the 50% level. When looking at the monthly chart, these levels would give us target prices of about USD 87.5, 80.35 and 75 before continuing the upward movement of the prices. In time the correction could hit the low in six to seven months depending how low the prices will go.
The oil prices have hit a significant price level, a level that most people seem to have accepted. The psychological barrier of moving from a ten to a hundred is quite strong and will need more than few weeks to be broken. A heavy buying has been done by large funds and investors the last months and these people need to lock in some profit, especially the ones who have clients who need a good End of Year results for their books. The best way to close out such positions is to get new blood into the market. This blood usually comes into effect when the markets have shown exceptional moves and new highs are projected into the future. At the moment the oil market is not for the fable hearted or tight funded.
