Oil has run hard – time for a pause?

Everyone is talking about oil now. Its over $80/ barrel! Way back in the fall of 2020, when I was pounding the table on oil at $40, nobody was talking about it. Instead, people were talking about the new green deal. Solar & clean energy. ESG. Feel-good stuff. The market was also fixated on the FAANGs. They were talking about new growth stocks like Zoom, Tesla, Peloton. Oil was $40. Who wanted that? Bidden was going to crush energy usage. We’d all drive an electric car, wear hemp shirts and circle the world holding hands singing Joni Mitchell’s Big Yellow Taxi (“Pave paradise, put up a parking lot”). Again….Who wanted oil at $40? Well, I did, and I told you about it. Blog readers who listened have made serious money on that trade. Partially – by avoiding the very stocks I suggested to avoid. More, because energy has surged to even higher heights than my original $70 target. I reiterated my bullish oil case in January here.

Ok, so now what?

I am still bullish on oil. I haven’t bought a hemp shirt yet. I love my carbon burning, growling exhaust, stick-shift & hand-brake (old school) highly engaging driving machines. But…Why do I like oil stocks? Well, moneyflow into crude is bullish (pane directly below price). Somebody out there likes it beyond just me judging the trend into energy futures. If $85 is taken out, we are looking at the top of the resistance band (not marked on the chart) near $100 or so.

Yet, we should take note: Oil is just about to hit a significant technical target. And its gotten overbought.  As oil gets closer to $85, it becomes more and more likely to pause. Moneyflow momentum (top pane) is overbought. Long termed indicators MACD (which is diverging negatively), and a 60-week ROC spiked recently. As did RSI.  The chart below tells the story:

 

What about oil stocks? The chart below is that of the iShares TSX energy ETF (XEG) – which has a mix of oil and natural gas producers. The chart tells us that the market has just passed a significant level of resistance near $10. Next is highly significant resistance at $11.50-$12. MACD is diverging. Other momentum indicators are overbought–ROC peaked a while back with no negative move so far. There is a decent chance for that last $1.50+ to appear before the stocks correct. But if crude pauses, per the $85 target noted on the chart above, that would probably put the move by the producers on hold.

Seasonally, oil can experience a peak in September and see some weakness through the remainder of the year. Below is Equity clock’s crude oil seasonality chart – which illustrates this tendency.

Conclusion

Oil has potential to move a bit higher, now that its broken $80. However, its overbought status does put some pressure on that happening. Seasonal factors put pressure on that potential too. I think there’s a decent chance to see a stall in pricing soon. So, keep an eye. Longer term, the target would be $100 or so, should $85 break.

If you follow this blog, you may have bought energy stocks last fall (2020), then lightened your positions this spring after a strong run just like I wrote about on our emailed newsletter. Subscribe if you don’t already here. At ValueTrend, we re-bought that position to get back to our full position a month or so ago – which turned out to be a good move. After the recent surge, we have once again taken the position out and materialized a short termed profit. We still hold a decent weighting in energy. We’re now at about 12% pipelines & energy stocks. Down from about 16%. We would add back to our energy stock holdings if oil pulls back again. If not, we are exposed and can still gain on a potential move.

 

Housekeeping

  • I’m speaking for the CSTA conference tonight at 8:00pm EST. I’m reviewing the case for a potential period of volatility or…possibly even a bear market. Its called “Bull, Bear, Bottom & Bounce” and it presents a plan on how to trade a potentially bearish or volatile period in 2022. You can join in on the webinar for free by contacting Regan here.
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6 Comments

  • Hi Keith. Loved your new book. I wanted to ask, if the $CAD roughly follows the price of oil, specifically against the $USD. What’s your short term comment on this subject?

    Reply
    • Thanks Tom re the book.
      Yes, the CDN $ has a fairly high correlation to WTIC crude oil. In fact, in the past 20 years its only had a negative correlation once–that was in 2014. All other years have seen them positively correlated.
      The price of oil is not correlated with USD. Its relatively random.
      But the correlation of oil to CDN dollar will imply a stronger CDN$ against the USD, all things being equal, if oil stays strong.

      Reply
  • I think that with as America’s incompetent president Biden in charge he doesn’t see or understand the consequences of high oil prices. He’s not about to lift any of the roadblocks to drilling fracking or transporting oil. Therefore I think oil will hold these high prices and could go a bit higher for some time

    Reply
    • Yes, my thoughts exactly. Currently its a wee bit overbought, so we reduced our position a bit, but longer termed we love the play.
      And yes–it seems that the left wing governments here and in the USA are “idealistic” rather than “realistic”–they are voted in by idealistic voters who are unaware of economic realities. So to appease these idealists, they shut down fracking, break pipeline contracts, reduce production…taking no heed of an emerging economy out of covid, supply chain problems and way before the world is ready to switch to clean energy at the rate that their idealism promised. Absolutely ridiculous. If you read the statements by Saudi Arabia after Biden begged them to re-open the taps, you can see they in effect said “hey – you should have planned better. Forget about it, we’re gonna let you suffer, fools”
      My words…but that was the less than hidden retort to the Biden-beg.

      Reply
  • Where do you sit with predictions of $2 gas coming by early December, and the prospect of $200 oil down the road?
    What kind of ripple effect does that have on inflation… with the return of fuel surcharges on freight?

    Reply
    • I continue to parrot the words of investment great, Howard Marks: “You can’t predict. You can prepare”. Sure, we can use technical resistance targets to suggest potential price points, but once through those levels, you can only go with the trend and sell when it ends. Oil hasn’t been that high before, so its anyone’s guess.
      Re inflation: yes, it is highly inflationary to see energy prices rise.
      See my latest video “Bull, Bear, Bottom & Bounce” for ideas on that strategy of not predicting, and following the charts.

      Reply

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