Examining oil, oil stocks and the oil-gold link

The second half of the previous week brought interesting pieces of economic data and disturbing geopolitical news.

On Wednesday, weekly inventory data from the U.S. Energy Information Administration (EIA) showed that crude oil inventories declined in line with forecasts. Traders had expected inventories to decline by 1.5 million barrels, while the actual decline came in slightly lower – at 1.428 million barrels. Taking into account another weekly inventory decline, current crude supplies are at their lowest level since Aug. 31 last year.

At the end of the previous week, the combination of positive global economic data, which improved the outlook for oil consumption, and geopolitical tensions in the Middle East fueled oil prices. Light crude extended Thursday’s gains and climbed above $106 per barrel on an intraday basis.

According to Reuters, manufacturing data for the two largest oil consumers, the U.S. and China, showed that both nations were regaining momentum. U.S. PMI data showed that the nation's manufacturing activity rose at its fastest pace in five months. In China, a PMI reading of 50.1 for August was a four month high and a huge jump from last month's disappointing 47.7.

As we all know, the markets have been speculating for months now that the Fed might trim its stimulus by September and it seems that recent positive economic data have raised such fears.  Keep in mind that any reduction in quantitative easing will cut the flow of cheap central bank money that has boosted market liquidity and bolstered riskier markets like commodities.

Taking this into account, investors are probably asking the same questions: What impact have these circumstances had on light crude’s chart? Have they changed the outlook for oil? Where are the nearest support zones and resistance levels? Can oil climb above $110 in the near term? Or maybe the oil bears will return and trigger a deeper correction?

To have a more complete picture of the current situation in the oil market, we take a look at the charts from different time perspectives. Let’s start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).

On the above chart, we see that in June the price of light crude increased above the long-term declining resistance line based on the July 2008 and the May 2011 highs (bold red line). In the following month light crude continued its rally and climbed above the next resistance line based on the September 2012 and March 2013 highs (the upper black line). Since then, light crude remains above both previously-broken resistance lines and the breakout hasn’t been invalidated.

When we take a closer look at this chart, we see that the black declining resistance line is also the upper line of a large triangle. If the oil bulls do not fail, the rally will likely be continued.

From this perspective the picture is bullish. 

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