Short Term Oil
Wow man, what a roller coaster. Oil goes from $147 to <$35 a barrel in ~5 months. At $145 oil, people were calling for $200 oil (myself included at the time, what can I say I was wrapped up in Peak Oil, and didn’t account for the ‘bubble’ part of the bubble). When oil got below $40 people were calling for $20 oil (even the average extraction price in the Middle East is $20, why exactly would oil companies pump oil out of the ground for no profit?). The clear (in retrospect) reason for this behavior is speculation. There was so much money sloshing around the system from the credit bubble that much of it went into commodities. When this money gets scared from short term deflationary pressures, it blindly rushes into Treasuries. And what do we get? A bubble in treasuries (but that will be the topic for another blog), and a crashing oil market sold well below reason.
So talking about fundamentals for just a moment: In this current environment, oil at $147 is no more sustainable than oil at $25. It is simply ridiculous. Also consider the demand part of the equation. Since the peak in July, global demand has dropped off by only ~10%. Certainly not in line with the price drop. And a lot of projects that were moving forward based on >$100 oil are now stopping because it is no longer viable. So supply is also dropping. Now there are OPEC production cuts to consider. I have read a lot of analyst estimates, some much more trustworthy than others, and a range that makes sense based on the current economic landscape is something like $45 to $75 oil (at least it makes sense to me, others may argue, and that's fine. It is really semantics at this point).
But all that is very interesting, but it is neither here nor there. We are not interested in the fundamentals per se (even though taking a look will paint us a better more believable picture), we are interested in the technicals. So the technicals say that we went from overbought to severely oversold in a matter of months in one of the biggest commodities markets in the world. Everything has inertia. The system doesn’t simply go from overbought to the fundamentally-correct price, it overshoots. And with a market this big, there is a lot of investor ‘inertia’.
Additionally, older charts will show that in 2000-2002, $40 oil was a resistance level and there was long term support in the $30-$40 range. So the level the oil bottomed at recently was right into long term support.
So lets look at some charts. Click on this link to view a larger version of the chart below.
The left chart is a 6 month daily chart and the right chart is a 3 year weekly chart. The daily chart shows positive divergence in the technicals. And this recent bounce of $35 is very strong taking it to $50 and the 50 day SMA. I think both of these will serve as technical and psychological resistance. And the stochastics are a getting a little toppy. So in the very short term (less than 1 week) this rally might run out of steam and correct for a little while. But now turn your attention to the right chart. I think oil is starting to come out of this correction. It is bouncing off of historical support and was just so severely oversold. I am betting (in CAPS and with real money) and oil will stage at worse a good relief rally here or at best a convincing bottom. Either way, I think the correction that may show itself in the short term (next few days) will be a fantastic opportunity to buy into a multi week rally.
As always I would love to hear your comments!
The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.