I have turned bearish on crude oil during the run up to above $146, and will not repeat recent analysis that, in summary, had an initial target for a decline to $135 and a secondary target of $110 on break of $135 amidst a background of a possible spike higher following an attack on Iran, which I concluded as a low probability event of less than 20%.

What is of critical importance is to remind oil investors waiting for a parabolic rise that we are already well into a parabolic move in crude oil. Therefore, waiting for a move to between $200 and $300 would be in addition to the existing parabolic move from $50 to $147 just a day ago.

The parabolic move began as speculators and investors started to pile into crude oil derivatives following the break above $80 in September 2007. This set potential targets for crude oil for 2008 at between $120 and $160, with resistance points along the way of $100, $110, and $125 based on technical analysis as the below graph illustrates, where analysis settled upon a target for crude oil of $150, as basically 200% of the $50 low and a nice distant round number. The move to the recent high of $147 has been far faster than anyone could have possibly imagined even as recently as three months ago to occur under normal trading circumstances – i.e., without the impact of a black swan event, as mentioned earlier.

Whilst we are all aware that the rise in crude oil prices is contributing to the surge in global inflation, what the rise in crude oil since the break above $80 has also achieved is a large influx of speculators and investors seeking to utilise the highly liquid and leveraged global oil markets as a means to hedging against inflation, and thereby igniting the parabolic move that in turn drives inflation countered by even more hedging against inflation by buying crude oil derivatives and so on and so on, leading to an extremely volatile parabolic state that could at literally any point lead to an unraveling of the crude oil rally all the way back down to the $80 breakout point! The trigger for this would be if future economic conditions were seen to deteriorate to the point where inflation was no longer seen as a threat, and therefore no longer necessary to have as much inflation hedging as has occurred over recent months, which has been one of the primary drivers of the parabolic move.

The recent blowup in the financials may be seen as such a trigger – i.e., the final nail in the economic coffin that would be seen as ensuring a deep deflationary recession during 2009.

In conclusion

Crude oil is well into a parabolic upmove that has been driven higher by inflation hedging, which had fed upon itself. The potential exists for a near-imminent cascading mainstream interpretation of future economic conditions to suggest lower future inflation which would lead to a fast-paced decline in oil prices targeting a move back towards the September 2007 breakout point of $80, with stop-gaps along the way of $135, $110, $100, and $85. Therefore, I continue to remain bearish on the prospects for crude oil during the next three to six months or so, barring a black swan event.