Analysis, Perspective, Trading Strategy
Full Speed Ahead for Oil Prices
By Joe Duarte on January 28, 2018
Duarte in the Money Options
It’s one thing to be correct, which is always rewarding when you trade
and write about the markets, but it’s another when your expectations
about the price target of a major commodity are met within a few short
weeks of the publication of an analytical article. So it is with some
humility and surprise that I’ve been tracking the price of crude oil
over the past couple of weeks. For those who may have missed it the
price of crude oil is now between $65 and $70, something I thought
was possible before the summer driving season in my January
4, 2018 article.
I made the prediction based on technical price trends as well as
on the expectation that the U.S. economy might get a boost from the
Trump tax cut. As I noted then regarding the price of West Texas Intermediate
Crude (WTIC): “Especially positive is the steady uptrend in both the
On Balance Volume (OBV) and Accumulation Distribution line (ADI) indicators.
In fact, it is the very uptrend 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.”
Moreover since crude has now entered my target price range, it’s a
good idea to revisit the sector and to deduce what the next direction
of prices may be.
Perception and Reality
Traditionally crude oil prices rise when there is a supply crunch,
when the economy strengthens or both. Currently the U.S. economy is
at its worst in fairly good shape, with low unemployment, regardless
of job quality. And if recent evidence is any clue about the future
companies are repatriating money from foreign lands, promising to build
U.S. plants and create better jobs while handing out bonuses to current
employees. To a certain degree, this anecdotal/tangible evidence of
positive outcomes from the tax cuts falls more into the perception
side of the equation because this is a developing situation, thus it
is somewhat uncertain as to when people will get their bonuses, and
if and how they will actually spend them. Furthermore, companies can
promise to build plants which never materialize or that in this day
and age may be staffed with robots. Still, the tax cuts seems to be
having a positive effect on the financial markets, with stocks making
new highs on a regular basis and the price of crude oil joining the
On the reality side of the ledger there are two facts to consider. One
is that the most recent GDP print showed 2.6% year over year growth where
3% was the consensus forecast. The other and perhaps the most important
one is that crude oil production in the U.S. shale belt is ramping up,
as the most recent Baker Hughes count of active oil and gas rigs in the
U.S. rose to 947, up 235 from the prior year. Since oil prices are mostly
driven by supply, the only way that a full tilt production situation
can sustain higher prices is when demand outstrips production, which
at this point is an essential unknown.
Momentum Remains in Place
Regardless of some valid questions about the economy and oil supply
investors are taking a leap of faith. Indeed, prices seem poised to
keep gaining ground despite rising supply (rig count) and possibly
slower than expected economic activity (GDP miss).
In fact, barring a major and severe price rout in the next few days,
the bulls get the benefit of the doubt for the intermediate terms.
In addition, as long as West Texas Intermediate Crude (WTIC) can stay
above $62-$65, given the positive On Balance Volume (OBV) and Accumulation
Distribution (ADI) indicators, we could get to the $68-$70 area in
a few weeks after a potential breather. The case for a short term pause
is suggested by the ROC indicator, which measures momentum rolling
over even as prices have been rising. However, as long as ROC remains
above zero, the odds favor a consolidation versus a pullback.
Investors who may have missed the rally in the frakking stock rally
may wish to consider owning shares in Continental Resources (NYSE:
CLR), a leading oil driller and processor with significant shale holdings.
This stock can be volatile and it has come a long way but what makes
it attractive is its general correlation in the current market to the
price of crude oil. I recommended to my subscribers in August 2017
and still own it myself.
Moreover, the stock has been consolidating and is showing signs of
being in the early stages of an attempt to move out of its short term
trading range. Note the slight upturning in the ROC while ADI and OBV
remain steady. As long as the 20-day moving average continues to provide
support, the odds of a credible attempt to break out toward the $60
area by CLR remain credible.
Superb Technicals and Good Enough Fundamentals
In this market, crude oil remains a leading play for the bulls. And
although there are some valid questions regarding the future and the
actual effects of the recent tax cut, as things stand now, the fundamentals
of the U.S. economy seem to be good enough to keep investors betting
on higher oil prices. So until something changes, this expectation
of better economic days ahead seems to be good enough to keep the uptrend
in oil viable for the next several weeks and perhaps longer.
One final note: the GDP miss may have been a reflection of business owners
waiting to see if the tax cuts were actually passed. If that was the
case then we should see stronger numbers either in the upcoming revisions
or in the readings for the next quarter. In fact, this may be what the
market is betting on. I own shares in CLR as of this writing.
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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