MUMBAI (CommodityOnline.com) -- Why do oil prices go higher and higher? Is there any substance in the arguments of experts quoted in the media? Is there any other explanation for rising crude oil prices?
Interest in a peculiar technical analysis developed by Ralph Nelson Elliot is now gaining momentum. And seminars and workshops on the Elliot Wave Principle, created in the 1930s, are being held in major cities in the country.
Some investment analysts claim they are capable of predicting price behaviour of commodities and markets based on investor psychology.
The wave principle posits that collective investor psychology (or crowd psychology) moves from optimism to pessimism and back again. These swings create patterns, as evidenced in the price movements of a market at every degree of trend.
Elliot Wave International (EWI) has come out with a "Why Oil Prices Change" series, which says that conventional analysis of crude oil price hikes only serve to popularize myths. Here are some excerpts:
Role of OPEC
Everyone blames OPEC. That can't be true, since non-OPEC states produce more crude oil than does OPEC.
Oil Supplies
The world is running out of crude reserves? Very unrealistic view of the "Peak Oil" variety; the world's proven crude reserves are in fact, growing.
Surplus Crude Oil
Surplus crude oil production capacity is too low; another argument. Capacity is only slightly below the historical norm - it actually increased in 2006 and 2007.
Demand driven
It is a myth that consumers and industry is using much more oil than before - actually, they're learning how to make energy go a lot further.
China and India
Do countries like China and India drive up oil demand? A comparison of year-to-year consumption shows that they have seen marginal gains, but the rate of gains has declined.
Supply Demand Imbalance
This is not true, again. Total world supply and demand have grown at the same constant pace since the mid-1980s. And by definition, two constant factors cannot account for wide fluctuations in the outcome (namely price) of a transaction.
An April Energy Information Agency report reveals that U.S. demand for petroleum has fallen steadily since June 2007, alongside a decade high in gas reserves and historically adequate oil reserves.
On Tuesday, crude oil rose to a record $122 a barrel in New York on threats to supply in Nigeria ... and growing Asian fuel consumption, Bloomberg noted.
Four days earlier, Friday, May 2: "For the near-term, you certainly want to keep an eye on the bullish prospects [for crude oil]. Again, we're going to look for a five-wave move up early next week, a pullback, and another leg up."
The militant attack on the Nigerian oil station happened on Sunday, May 4. The report projecting strong demand for oil from China came out on Tuesday, May 6. However, EWI's Energy Specialty Service made a specific, bullish forecast for oil last Friday, May 2.
According to EWI, its Energy Specialty Service analyst couldn't possibly know about those events two days in advance. He didn't need to. Steven Craig made a bullish call for crude oil last Friday (May 2) for reasons that had nothing to do with supply and demand.
It was Elliott's wave patterns in crude oil charts that helped. It was predicting another push higher, which showed Steve Craig, the analyst that crude oil traders were in a bullish mood. That's it.
Weather
This myth goes back to Hurricane Katrina, which to this day is said to have "caused" shortages and a huge increase in oil prices. Katrina came ashore in Louisiana on August 29, 2005; not only did prices not go up, they actually declined 19% in the three months that followed.
Oil Up When Stocks Down
Then there's the endlessly-repeated notion that "stocks go down when oil goes up." EWI says prices in a freely traded market are always a function of what the seller asks and what the buyer bids. Innumerable factors will affect the psychology of the buyer and seller - yet when their minds meet, you get a price. And make no mistake: that meeting of those minds is, above all, psychological.
Dollar and Oil
The greenback has depreciated 30% against the world's currencies since 2002 - where the price of oil has exploded 500%. Not exactly an even fight.
The truth of the matter is simple: Oil prices are not being driven by ever-fluctuating external news events. The "winning" factor behind the market's trend is mass social mood, as reflected in clear and consistent Elliott Wave patterns unfolding on oil's price chart, according to EWI.
However, Elliot's Wave Theory has its own critics who argue the theory is pseudoscience: it is unprovable, is inconsistent with the generally accepted efficient market hypothesis and is at odds with modern social science.
Elliott Wave analysts (or "Elliotticians") hold that it is not necessary to look at a price chart to judge where a market is in its wave pattern. Each wave has its own "signature," which often reflects the psychology of the moment. Understanding how and why the waves develop is key to the application of the Wave Principle.
By arrangement with www.commodityonline.com.
