Oil is one of the most volatile of the commodities and fluctuates with the prospects of the global economy and of course the happenings in the Middle East.
Yet, if you really look forward, how can you not like oil given the growth in China and, more importantly, the emerging growth in India?
In June 2012, when oil prices fell below $80.00 and some were saying to sell, I was positive, as the chart suggested support would surface and the weakness was not a trend.
The U.S. Energy Department increased its projections for crude oil prices for this year, citing that global oil consumption would rise to a record in 2013. (Source: Shenk, M., “U.S. Energy Department Raises 2013 Oil Forecast,” Bloomberg News January 8, 2013.)
Take a look at the price chart for the spot West Texas Intermediate (WTI) futures contract. After trading at $115.00 in May 2011, oil prices slid despite multiple attempts at rallying back to the $100.00 level. The spot WTI is again back below its 50-day moving average (MA), but I expect there will be decent support at the lower trendline and the 200-day MA.
The chart is displaying what is looking like a bullish flag formation setting up, which means higher oil prices could be coming to back over $100.00 in the best-case scenario based on my technical analysis. You need to also be watchful of the $80.00 support level, which was breached on several occasions; but in each case, a rally followed.
Chart courtesy of www.StockCharts.com
I believe oil will continue to hold above at least $80.00 a barrel going forward and will rally as the global economy strengthens. If you extend the oil futures contract to 2021, the current prices range from $83.00 to $92.00, so I’m not that worried and don’t have the urge to go and sell as some market watchers are saying.
While I expect demand for oil will rise should the global economy continue to improve, the ongoing geopolitical issues in the Middle East and North Korea remain real threats that could easily drive up oil prices.
I also expect oil prices to be supported by the Organization of Petroleum Exporting Countries (OPEC). OPEC estimates oil prices in nominal terms could hold in a range of $85.00 to $95.00 a barrel for the rest of this decade, according to its internally produced “World Oil Outlook” (WOO) report. The report blames the spikes in oil prices as driven by speculators, which I fully agree with, but it is part of the business. An interesting note in the WOO report is the assumption oil will reach $133.00 per barrel by 2035.
It’s interesting to understand how the oil cartel thinks. The report says the current level in oil prices is due to the state of the global economy that “will be marked by below average trend growth, in combination with high unemployment in developed economies and continuing global growth imbalances.” (Source: “World Oil Outlook,” Organization of Petroleum Exporting Countries web site, 2011, last accessed March 8, 2013.)
And while oil prices are estimated to trade below $100.00 a barrel for the next eight years, you know that there will be volatility that can drive prices well above $100.00.
In my view, I would be looking at accumulating and NOT selling oil stocks on weakness.
By: George Leong
Posted: March 11, 2013, 10:52 am
We believe the stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion of our money supply....