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.
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.