As most of you know, while I do invest in stocks in the energy space, and occasionally give you my opinion of individual security based on the research I do for that investing, my day-to-day interest is more in oil, and specifically in crude oil futures. I follow the various influences on that closely and, like most traders, nearly always have an opinion on the longer-term trajectory of the market even if my trades are typically intraday. Recently, though, I have not had one and have just been trading off of technical signals and keeping everything very short term.
That is changing right now.
My lack of a long-term base case for crude has been because there are conflicting influences on price, some bullish and some bearish. That is nothing new. There always are both bullish and bearish influences, and sometimes they are of roughly equal weight, as they have been for a while now. There is, however, always a point which my research and forty years of experience tell me that the balance is shifting, and we are at that point now and oil looks set to climb as a result.
Mainly, that is because the biggest bearish influence on crude is becoming less and less certain. Even as OPEC has cut output and maintained their lower production levels and the disruption of the Russian war in Ukraine has been added to by a flare up in the Middle East, oil prices have been held back by traders' pessimistic outlooks for global growth. A couple of years of rapid rate hikes in the US…
As most of you know, while I do invest in stocks in the energy space, and occasionally give you my opinion of individual security based on the research I do for that investing, my day-to-day interest is more in oil, and specifically in crude oil futures. I follow the various influences on that closely and, like most traders, nearly always have an opinion on the longer-term trajectory of the market even if my trades are typically intraday. Recently, though, I have not had one and have just been trading off of technical signals and keeping everything very short term.
That is changing right now.
My lack of a long-term base case for crude has been because there are conflicting influences on price, some bullish and some bearish. That is nothing new. There always are both bullish and bearish influences, and sometimes they are of roughly equal weight, as they have been for a while now. There is, however, always a point which my research and forty years of experience tell me that the balance is shifting, and we are at that point now and oil looks set to climb as a result.
Mainly, that is because the biggest bearish influence on crude is becoming less and less certain. Even as OPEC has cut output and maintained their lower production levels and the disruption of the Russian war in Ukraine has been added to by a flare up in the Middle East, oil prices have been held back by traders' pessimistic outlooks for global growth. A couple of years of rapid rate hikes in the US and a real estate led slowdown in China have cast doubts on the economic prospects of the world's two largest consumers of oil, two countries whose combined usage makes up around a third of the total global demand.
In the US, though, the evidence is mounting that the economy is handling the jump from what were effectively zero interest rates to around 5% exceptionally well. The jobs market remains strong and growth, while a little slower than became the norm in the recovery from the pandemic, has remained positive. FOMC members have spent this week trying to damp down expectations of an early rate cut, but nobody is talking about another hike at any time soon. So, the worst case scenario is a slightly longer than expected period of rates at current levels, levels which haven't stopped growth or notably slowed activity.
The situation in China is completely different. There, collapsing real estate prices and highly leveraged development companies have created a situation that is a little reminiscent of what sparked a recession in America in 2008. Then there is deflation. Chinese prices are falling, which might sound like a good thing, but in economic terms is not. If you doubt that, ask Japan.
The difference, though, is that for all of its embrace of capitalist principles, China is still a command economy. That has obvious pitfalls, but it does make it easier for the government to contain problems in one part of the economy and to implement rapid, targeted stimulus when needed. So far, they haven't chosen to do that aggressively, but now that people's satisfaction with the Chinese Communist Party is so tied to economic success, they will feel the pressure to do so soon if things don't improve.
Meanwhile, with the US striking targets in the Middle East for two separate reasons and Israel showing no signs of slowing their attacks on Hamas, the world's most influential oil producing region is descending into even more chaos than usual. Both supply and demand factors are looking more bullish for oil now than they have for some time.
The technical picture is not as important in this kind of analysis as the fundamental, but the chart is also starting to look bullish…
Crude Oil 6-Month Chart
After falling quite hard in September, October, and November, crude found a low just below $70 in early December. Since then, it has shown a pattern of higher lows and higher highs, and if the current move up takes us above January's $78 high that upward channel will be further reinforced.
All in all, over the last week I have gone from having a neutral view of oil to being decidedly bullish. Regular readers will know what that means in terms of trading strategy for me from here, but in case you don't fit in that group, I should explain. It doesn't mean that I will be establishing a long position and sitting on it, nor that every intraday trade for a while will be long. It just means that with a bullish long-term base case, I will be allowing some long positions to run past their initial target levels when they hit, while setting slightly tighter and stops on any shorts and erring on the side of taking early profit on those trades.
As for how high we can go, if I am right and the demand concerns fade over the next month or so while supply remains tight, there is no reason why crude can't get back to the $90 level at least. That is a long way off, but at least I now have a view and a target, and that makes me happier than I have been for a while.
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