Oil Prices - the beginning of a bubble or shortly before a major correction?

Some observations on Crude Oil - interestingly enough, since November 2010:
a) Oil prices have risen by about 35%
b) the global number of oil tankers underway has fallen by around 8%
c) the active oil tanker fleet's average travel speed has also fallen by about 5%,
d) at the same time, net speculative positioning in Oil futures has reached historical proportions.
e) OECD oil storage figures are acatually at the upper end of their seasonal bands! 

What does it all mean? 
1) It looks like the biggest part of the oil price increases is induced by geopolitically motivated speculation and most likely from self-reinforcing trendfollowing of investment bank clients' (through structured products, etc.).
2) We remain structurally bullish on Crude Oil for the foreseeable future due to the long term supply constraints and a structural and price-inelastic increase from the industrialization of Emerging Markets.
3) Due to an obvious temporary weakening in demand as evidenced by slowing-down tanker-activity and rising US inventories, we believe that the crude oil market is now becoming increasingly vulnerable in the medium- to short-term for a hefty correction.
4) As we remain structurally positive and the current upleg could still be the beginning of another oil investment "Mania", we would not at all recommend to sell crude oil short, but to remain engaged for the long run. 

But in the short run, it looks like the thing is getting a bit overstretchted. Investors who entered some long positions a while ago could start to lighten them up (e.g. reduce by a third, into further strength) and take some profits off the table, but only to increase their exposure again at a later stage - hopefully from better prices.

Equity markets: slowly deteriorating?

Out indicators signal that after the post Japan-Crash-Rebound, short-term equity market risk has rebounded quickly and - despite recent weakness - is approaching the February 20 levels again.

US Earnings reports have started OK so far, but do not seem to provide massively positive surprises (yet?). At the same time, people start to ponder about the consequences of QE2 ending - on both the stock market as well as the bond market (which would of course produce spillover effects into the stock market). expand »

Therefore, stock markets are likely to have entered into a new phase, which might be characterized by higher volatility and less smooth uptrends going forward.

Important to note that for the first time since the November 2010 correction, aggregate medium-term Institutional sentiment is deteriorating, while indecisiveness and irritation among investors has risen quite a bit over the past 5 days. This builds potential for a sizeable move into either direction.


Bottom Line: a second downleg in the correction which started around February 20th could be developing and we advise caution.


On a side note: Market Cycles (experimental technology):
A possible upcoming turning zone could be around April 25-28.
In addition, our cycle forecast highlights the time window of Mid-May as an area of potential instability.