The bull market in crude oil is taking what I would term “a breather.” While I’m a long-term bull on crude oil prices and energy futures, earlier this week we made some money shorting oil for clients — and that proves some short-term speedbumps.
However, my short-term short on oil does not negate the longer term bullish supply/demand outlook however. This week, let’s analyze the reasons behind the recent price break in crude oil, and where we might expect the oil market to find support for futures traders.
Top 5 Reasons for the Recent Oil Price Drop
1. Gaddafi has accepted a “roadmap” to end the Libyan civil war.
2. Goldman Sachs has turned temporarily bearish on all commodities, and recommended to their clients to exit oil investments.
3. The market became overbought technically; the 9 day RSI (relative strength index) registered above 80 at the top. Last time it was this high (in early March) oil prices corrected dramatically.
4. Overall Middle East unrest appears to have eased at this time.
5. Gasoline over $4/gallon lessens demand.
Top 5 Reasons This is a Correction, Not a Bear Market for Oil
1. The rebels have not agreed to the cease fire, plus some of Libyan oil production has been lost (estimates vary), and infrastructure rebuilding takes time.
2. Goldman is good, but not always right (after all it took the Fed to bail them out once before).
3. With the recent price correction the RSI has retreated back below 50; in other words into neutral territory correcting the overbought situation.
4. Do we really believe it will remain all quiet on the Mid-East front? Unrest in any of a half dozen oil producing countries (from Libya to Iran….and let’s hope Saudi remains calm) could arise again at any time.
5. A good deal of gasoline demand is inelastic, oil is a global commodity (Asia’s still growing) and a recovering economy in the USA is positive for oil demand.
Then there’s the ongoing debt bomb in the USA. Why is this bullish oil? Until it appears our country starts on a road to debt reduction the dollar will remain weak. A weak dollar strengthens commodities priced in dollar terms; and oil is on the top of this list.
The last major oil price correction took place in March, a $13 break from $108 to $97, and that one proved to ultimately be a buying opportunity. This correction has already covered $8/barrel, beginning at just above $113, with a recent low of $105. Time will tell if this is enough of a break, it might just be, and if there was a $13 break top to bottom this would maintain oil prices above the magic $100 mark.
Remaining above par at this time would be my bet.
George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: firstname.lastname@example.org. Phone 800-233-4445.