Outlook for oil

The seasonal period for oil typically starts in January and ends in early May. This year, that pattern certainly did play out. Today, I note that crude oil futures are up over 2% ahead of the sanctions on Iranian oil imports being reinstated.

So, is this the sign that we should ignore the seasonal pattern and hold oil? Well, yes and no. Here’s why:

  • Significant resistance is being tested at the former support level of $65/barrel—see chart
  • MACD is in good shape – heading up, no sign of rolling over. This is a good mid-long termed indication of strength
  • Shorter termed momentum indicators like stochastics and to a lesser extent RSI are overbought
  • Cumulative moneyflow (bottom pane) is long termed rising – while moneyflow momentum (top pane) is bullish.

Conclusion

WTI Crude oil is probably a bit overbought right now. The above noted $65 resistance level – which is being tested now– will probably be significant enough to merit a pause. As it approaches the end of its seasonal period for strength and this resistance point, it may not be a bad idea to lighten positions. However, the longer termed picture is ok—provided we do see $65 taken out eventually. Such an event would target about $74. An overbought turndown in crude will not help the producers in the near term. This, given their positive correlation between WTI (black line) and the producers (red line XLE-T). The chart below shows us how they were not so well correlated  before 2017 – that relationship has steadily improved in the past 2 years.

If crude merely corrects over the summer, and then returns to a longer termed bullish picture thereafter, one might be profitable in owning the producers again at that point. Look for a break of $65-$66 (by a few days). That would eventually target $74 – after which one might expect further upside. That, however, is a ways away.

For now, my call is a correction of some sort before any further significant upside. We reduced our oil holdings a bit last week, and will look to reduce further commodity exposure (most commodity ETFs are heavily energy exposed) in the next while in light of the neartermed potential for a pullback on oil.

4 Comments

  • I took some profit today. Is the next seasonal strength in July to September? When does the seasonal strength end for base metals?

    Reply
    • The only seasonal period i am aware of for materials and metals is over the winter.

      Reply
  • Hi Keith, this is slightly off your blog topic on oil.Though I wanted to get a comment from you on this quandary I have, if possible.

    I watch to BNN.ca almost every day. In particular I look at every advisers market outlook in the BNN video section daily.

    I find that some advisers have very different market outlooks to other advisers.
    For instance the majority of advisers seem to think there be a pullback soon and and that stocks are very expensive right now. While some other advisers (like Patrick Horan Agility Capital on BNN today) seem to think that the market will go much higher and other advisors think stocks are still fairly cheap and will go higher. How does one decipher market outlooks other than using technical Analysis such as you yourself use?

    Thank you, Dean.

    Reply
    • Good question Dean
      The reason for the disparity in opinions is because Advisors are part of the market. Thus, it takes a bull to buy and a bear to sell–somebody has to be bullish to buy the stock off of the bear. Only one of these two (figuratively speaking) is right. But both need be present for the trade to occur.
      When everyone is a bull or a bear (or the majority) you have what we call an “overcrowded trade”-vastly parabolic overbought or oversold markets-this is where sentiment studies come in handy. As smart as us Portfolio Managers might seem, in the end, you really only want to follow the “true” smart money and “fade” (do the opposite of) the dumb money. That is, we want to follow the sentiment of large institutions (pension plans, commercial hedgers) and top pro traders. You want to contrast their moneyflow against dumb money (retail investor studies, mutual fund moneyflow, small options trades, etc). I follow that flow via my Bear-o-meter.

      I don’t call myself an “enlightened one”–and I don’t consider too many of my colleagues all that capable of reading the crystal ball either. But there is a track record of quantifiable results that shows big differentials between true smart vs dumb investors as relatively predictive. So, instead of trying to be a soothsayer, I just quote the data from this differential. Who would you rather follow…some guy on BNN … or the “real” smart money (ie OMERS pension, Warren Buffett, commercial hedgers, etc)?
      When smart $ buys, while dumb $ sells–you are getting really close to the bottom–and visa versa for tops. Do a search on the blog using the search tool and type in smart money or similar wording–you will see lots of my write ups on that topic

      Reply

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