I noted on Monday’s blog that I am bullish on the price of oil over the coming year. My ultimate target remains somewhere near $62, although I suspect there will be plenty of pullbacks on that journey. This outlook will change if $40 support is broken – crude currently sits near $50. I suspect some sort of pullback, likely not lower than the aforementioned $40 support level, may occur in the coming months.
Seasonal trends weak in the winter
WTI oil reaches its seasonal peak around this time of the year, and tends to weaken into February. Below is a chart I pulled off of www.equityclock.com – you can see this pattern clearly on the chart. Brooke Thackray notes in his “Thackray’s Guide” that there are two seasonal periods for energy. These are Feb 25th (buy) to May 9th (sell) then July 24th (buy) to October 3rd (sell).
Smart money is selling oil
Further, and perhaps even more importantly, commercial hedgers (aka “smart money”) is shorting oil right now. According to sentimentrader, these better-than-average investors are currently net short over 400,000 contracts on WTI. This was only exceeded in the summer of 2014. The chart below shows us how oil peaked precisely at that point – in and around June/July of 2014-followed by a decline from October and on. As you know, WTI crude has not yet recovered from that catastrophic decline.
The chart above shows us that a level of technical resistance resides around current price levels of $50. If and as that level is cracked to the upside, a Head & Shoulders bottom will have been materialized. Until then, the formation is incomplete. Meanwhile, the short termed momentum indicator stochastics and RSI are rounding over while the longer termed momentum indicator MACD is looking like it wants to do the same. On a positive note, moneyflow remains strong – which can be a mid-long term bullish sign.
Supply / demand
Truthfully, nobody can predict the future supply demand picture for oil. U.S. inventories of crude oil were reported to have fallen some 3 million barrels in a late September report. Markets that had anticipated a higher level of stockpile. However, as I understand it there is still more supply than demand for crude. Reliance on reduced production via the recent OPEC agreement may be wishful thinking. OPEC recently announced some production cuts, but members have a history of not keeping to the agreed quotas.
To me, all of the above factors suggest a bit of a ‘time out” for oil. As such, we sold our oil related positions recently, with the idea of revisiting the trade later in the winter.