Oil prices rallied in February following the news that Venezuela was pushing for a production “freeze.” Within a few days, key players in OPEC had confirmed the plan.
Despite the cold water Iran tried to throw on the idea, oil prices completed a bullish divergence, and West Texas Intermediate oil prices hit a technical objective on March 18. At the time, we suggested that this was likely a point where oil prices would run into resistance and begin to fall, which subsequently occurred.
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The real question at this point is whether oil prices will stay at the support level that was created by the mid-point of that bullish divergence.
OPEC oil ministers are out again this week affirming plans for a production freeze, and the Energy Information Administration report on Wednesday probably helped crude bounce further.
As you can see in the above chart, key technical levels are likely helping the verbal intervention from OPEC to support prices.
Will Higher Oil Prices Help Oil Stocks?
Unfortunately, it does not automatically follow that higher oil prices will push oil stocks out of the current range for two reasons. The first:
- Energy isn’t defined by one price. Wednesday’s EIA report was certainly a positive surprise for oil prices, but the picture isn’t entirely uniform. Inventory drawdowns of 4.9 million barrels broke a seven-week trend of rising inventories, which is only the second time in the last quarter that inventories have fallen. However, gasoline and distillate inventories rose, offsetting much of the initial enthusiasm.
Rising oil prices may help exploration and independent oil companies this week, but refiners and marketers are falling. The push and pull between different groups in the sector should continue until economic fundamentals start to show signs of growth. As you can see in the next chart, gasoline futures prices have formed a “bearish divergence” at resistance and could easily fall further. The technical picture makes higher prices much more difficult to justify.
The second:
- Even if a production freeze is implemented, that quota would be at all-time record levels. Even if oil prices rose temporarily, the slack could be taken up by other non-OPEC producers. A lasting bullish trend is dependent on better growth numbers in North America, Europe and, especially, China.
The fundamental catalyst needed to knock oil stocks out of the current channel is not likely to occur this earnings season. However, market cycles ebb and flow, so a lasting bullish breakout isn’t impossible heading into the third and fourth quarters of 2016.
Traders are holding their breath heading into earnings season. Expectations are low, despite very high valuations.
If buybacks are put on pause in April and oil prices remain channel-bound, a January-style correction is a high probability. There is always the chance that the Federal Reserve could do something unexpected on April 27, when it is expected to make its next policy announcement, but a correction could complete by that time anyway.
We suggest that traders remain flexible and ready to change course quickly as earnings reports increase volatility levels.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
