Eoin Treacy's view pikes in crude oil prices have invariably acted as economic headwinds as they contribute to higher costs for everything from transport to agriculture. A 76% rally between August and April qualifies as a spike, particularly since it occurred from what were already historically high levels in nominal terms. In fact Brent crude has now spent more time above $100 than in 2008; 197 days versus 195. (Also see Comment of the Day on August 3rd). High oil prices act as a tax on consumption. While there is a lag in how long this takes to be reflected in economic statistics, the effect is undeniable and perfectly logical. The longer prices remain at elevated levels the greater the chances are that it will alter consumer and industry behaviour.

Brent crude has posted a progression of lower highs since April but has held the majority of its advance in what has so far been largely limited to a relatively lengthy range. Various reasons for oil's advance have been proposed such as tightness in the Brent market and political uncertainty in the Middle East. These are supply side considerations and ignore the effect on demand such high oil prices have. Demand destruction is an increasingly relevant consideration at these levels. Supply concerns as well as speculation and a desire to hedge fiat currency risks have helped support prices. However, the demand side of the equation cannot be taken for granted. If the US and Eurozone economies continue to slow and Asian central banks continue their efforts to combat inflation pressures, demand for oil is more likely than not to decrease which should lead to lower prices, at least temporarily.

Brent crude bounced from the psychological $100 level last week and retraced half of its recent decline from $120. There has also been a number of sharp downward dynamics within the range, suggesting greater supply than demand. In the current environment, and assuming the absence of an additional exogenous shock, there appears little chance oil will sustain a move back above $120 in the short-term. However a continuation in the progression of lower rally highs will be required to confirm a return to supply dominance.

I last reviewed major oil companies when they were completing lengthy consolidations in early December. Most hit medium-term peaks in April and have not been immune from the recent selling pressure. It is conjecture as to how much demand destruction in the oil market has already been priced in to these shares so let us stick with the chart facts.

Exxon Mobil (2.55%) has given up approximately half of last year's impressive advance. It is oversold in the short-term but demand will need to demonstrate an ability to sustain a rally to confirm a return to dominance. A break of the progression of lower rally highs would be required to confirm a return to medium-term demand dominance. Royal Dutch Shell (5.18%), Repsol (5.5%), Occidental Petroleum (2.1%), Chevron Corp (3.17%), Conoco Philips (2.09%) and Marathon Oil (2.19%) share similar patterns.

Hess Corp (0.67%) has returned to test the lower side of the more than 2-year range. It is also oversold in the short-term but needs to break the progression of lower rally highs and sustain a low above the $55 area, on a pullback, to demonstrate a return to medium-term demand dominance. Murphy Oil (2.09%) has a similar pattern.

Sector laggards such as Total Fina (6.86%), ENI (7.76%) and Statoil (4.95%) have higher yields but failed to break out from their respective bases last year. They have now returned to test the lower side of these congestion areas and have found at least short-term support. They will need to rally from above last week's low on a pullback to demonstrate more than temporary respite near current levels.

BP (3.1%) recovered half of its 2010 decline by early 2011 but has posted a succession of lower rally highs since. A sustained move back above 450p would be required to confirm a return to medium-term demand dominance.

The above shares have all fallen aggressively and are at risk of a further decline if economic conditions continue to deteriorate. However, oil demand is also often one of the first things to recover following an economic contraction so these shares will be well worth monitoring over the coming weeks and months not least because a number, such as Exxon Mobil and Royal Dutch Shell have solid records for increasing their dividends.

A number of oil service companies have also experienced some significant technical deterioration. Halliburton, Schlumberger, Baker Hughes, National Oilwell Varco, Subsea 7, PetroFac, Saipem, Technip and China Oilfield Services, lost momentum from early this year. A number failed to sustain the breakouts in late July and they have all fallen precipitously. They found at least short-term support last week but will need to hold above those lows and sustain moves back up into the overhead ranges to indicate more than a temporary return to demand dominance. (Also see Comment of the Day on January 25th).