Oil, Summer Driving Not Likely Getting Cheaper

As an investment professional and especially as a technically oriented trader I have the right, or more accurately the obligation to review my investment/trading thesis on a daily basis.  As such, since I last posted my vibes on the price of oil here ( http://investorplace.com/2013/03/oils-in-a-slippery-spot/) on March 1st, the commodity has acted as suspected,  which is cause to review the view.

In the full transparency which I work, allow me to walk you through the charts of oil, taking into consideration the all important dollar index and seeing what may be in store for this summer’s driving season.

From a longer-term point of view not much has changed for the price of crude oil as it remains trading in a multi-year narrowing trading channel.

Also through a longer-term lens, oil and the u.s. dollar tend to move inversely and thus have a tendency to mean-revert.  While that’s nice to know, more important is the timing of a mean-reversion.  Given the difficulty of forecasting such I find it easier to focus just on the general trends of the dollar index for clues.

On the below chart I plotted the US Dollar Index etf (UUP) versus the United States Oil Fund etf (USO), which brings to daylight the recent divergence between the two.

The chart of US Dollar Index etf (UUP) on its own suggest at current levels it is overbought and due for a correction, which works well into my thesis of a narrowing of the spread between the dollar index and oil.

On March 1st I discussed the below daily chart of crude oil futures as the price was hanging at a critical intermediate-term level near $89.50-$90.50.  The support area was/is made up of 50% Fibonacci support from the November 2012 – February 2013 rally.  Furthermore, the support area was smack in the middle of the broader trading range highlighted above.  Given that my March 1st musings have come true, supported by technical levels and an overbought dollar index, I continue to favor oil prices rising for the coming weeks if not months with a price target toward the upper end of the long-term trading range, near $98.

As a bigger picture thought, I would like folks to keep the following in mind; lower oil prices can either serve a tax cut or a sign of lower growth.  Take 2008 for example, as oil plunged it eventually took stock prices down with it.  Hence it was a sign of slowing growth.

In conclusion, the current setup remains favorable for rebounding oil prices over coming weeks and months.  This is supported by my analysis above as well as favorable/rising seasonable months in April and May for oil.  The bottom line is that barring any major sudden weakness in global macro data, oil prices and thus prices at the pump will likely be higher than lower this summer.






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