Analysis, Perspective, Trading Strategy
Will Crude Gush to $80 in 2018?
By Joe Duarte for January 2, 2018
Happy New Year! It’s time to make some changes. And the first change
is a new title for this column: This Week in the Money. But there is
more to come than just a new title. From here on expect more focused
and actionable content aimed at making you money. Here is what you
- Sector Specific focus
- Pertinent background and time sensitive information
- Focus on external and internal market events
Out with Old – In with the New
If you think 2017 was full of surprises, you better raise your expectation
levels for 2018. Given the way the year ended – stocks rolling over
and oil rallying – it’s hard to know what lies ahead. But you can make
one bet, the potential for a significant rise in volatility in all
markets is higher than average.
Who would have expected the Federal Reserve following through with
raising interest rates, the GOP actually passing its tax cuts, and
the rise of geopolitics as a market influence almost all at once? But
that’s exactly what’s happened in the last few days as the year transitioned.
Indeed, it is that last factor, geopolitics, combined with the unknown
effects of the tax cut and their impact on the U.S. economy which may
increase the flow of money into oil. This may be even more notable
as high valuations and flagging momentum sap the advance in the traditional
money magnet sectors such as technology.
Indeed, investors will be wise to watch the events in the Middle
East and Asia as potential global hot spots may flare to the point
of significant political, if not armed conflict. And although I am
not expecting a bear market in stocks in 2018, I am expecting some
sort of consolidation in the early part of the year. As a result, I
am focusing on oil as a potential overweight area of interest.
Crude Ends Year with a Kick
The stock market limped through its last trading day of 2017, but
West Texas Intermediate Crude (WTIC) ended the year with a bang. The
combination of an unforeseen production shortfall in the most recent
supply data from the U.S. government, the arrival of a major winter
storm, and a flare up in the Middle East with Iran at the potential
epicenter, gave traders good reasons to push prices higher.
The current price chart for WTIC is a classic study in bullish technical
analysis. First, prices recovered all their losses from the July 2017
bottom. Then, after a bullish consolidation, money started moving back
in and upside momentum has been increasing with the $60 price area
now becoming short term support and the $55-$58 price band offering
intermediate term support. Moreover, from a practical standpoint, as
long as prices stay above $55, the bullish case stays alive.
But there is much more to this price chart. Especially positive is
the steady up trend in both the On Balance Volume (OBV) and Accumulation
Distribution line (ADI) indicators. In fact, it is the very up trend
and very constructive trajectory of these two key technical factors
which suggest we could see the price of crude trade above $70, perhaps
within the next three to six months.
Of course, I don’t expect prices to go straight up. Indeed, in the
short term, we may see some backing and filling, as the RSI indicator
is nearing the overbought zone. I take this indicator seriously, given
its record of pinpointing tops and bottoms over the last twelve months.
Under the Hood
Investors should choose wisely before putting their money into crude
oil at this stage of the advance. First rallies in the price of crude
oil are always about supply. And the potential for a significant supply
squeeze, intentional as through OPEC production cuts actually holding,
or unintentional such as what may result from some major conflict arising
and disrupting supply lines is not a factor which is fully priced in
at this point. In fact, even after a huge run since July, the price
of crude is still rising. That suggests that we may actually see a
split in the direction of prices, at least in the short term between
crude oil and crude oil and related stocks. In fact, even as crude
builds momentum, energy stocks may be nearing a price consolidation
phase. This conclusion is based on the two price charts below.
The NYSE Arca Oil Index (XOI), which houses the big cap oil and gas
stocks such as Exxon Mobil (NYSE: X) is very overbought with the RSI
reaching levels which have led to short term pullbacks over the last
couple of months.
A similar picture is clear from
reviewing the price chart for the Dow Jones Oil Exploration Index (DJSOEP),
where many of the frakking stocks make their home. Indeed, the frakking
stocks seem to be less overbought than their big sisters in XOI. This
suggests investors are a bit more skittish about the international
market for crude where Exxon lives as opposed to the shale deposits
where the frakkers make a living.
Crude May Set the Bar for the Year
I was bullish on crude oil for most of 2017 and I remain in the positive
camp for this often overlooked commodity. Moreover if last year is a
clue to the future, I expect crude oil prices to move higher. This may
be in fits and starts, and may feature oil exploration stocks outperforming
the traditional oil names in the early part of the year. And If I had
to make a prediction about the price of crude, I would put some money
on the potential that $65-$70 is not just plausible, but likely by the
summer driving season. Finally, the bullish case for crude falls apart
on a decisive break of the $55 price area.
Joe Duarte is author of Trading
Options for Dummies, now in its third edition. He writes about
options and stocks at www.joeduarteinthemoneyoptions.com.
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