Oil rallies a few days in a row, and bingo! -- already there's talk regarding an oil bottom. True, oil has rallied more than 40% -- it traded at around $45 early Tuesday after touching $32.40 per barrel about a month ago -- but investors may want to hold off buying oil futures contracts or venture forth with oil-related stock plays. And the reasons are both technical and fundamental.
First, technical analysts almost universally agree that 'a bottom' is a process, not an event. In other words, don't expect it to happen in a day, or a week; typically, a bottom can take weeks -- and sometimes even months -- to form. Second, oil has two price hurdles up ahead: the 50-day moving average at $46.27, and the psychologically-important $50 level. If oil can clear and close above each level for three consecutive days, that would be bullish, but we're not there yet. And until it does, the oil bears will have much technical evidence to argue that oil's current rally is largely a short-covering rally.
Third, from a fundamental standpoint, the oil bears remain in charge: inventories continue to build at key U.S. storage area, such as the NYMEX contract storage facilities at Cushing, Oklahoma, and in supertankers at sea. Further, it is by no means certain among traders that OPEC's oil supply cuts will be enough to offset stagnant global demand and year-over-year oil consumption declines in the United States. If those U.S. consumption declines continue, oil's downward path will continue.
Finally, don't succumb to superficial claims. Currently, some are arguing that 'oil can't possibly drop below $30 per barrel,' particularly if the U.S. fiscal stimulus package increases GDP growth above where it would be without the stimulus. True, the fiscal stimulus will help, but the oil equation is tied more to oil demand than GDP growth. In other words, economic conditions could improve, but large oil consumption growth may not return, due to changed consumer patterns.
Oil Analysis: Previously, an economic recovery almost always meant rising oil prices. But we've entered a new era, one that features a cost-conscious consumer. Those economizing consumers aren't likely to return to their gas guzzling ways, hence even when oil's price recovers, don't look for it to go rocketing ahead -- something to consider before plotting an oil play.
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Reader Comments (Page 1 of 1)
1-27-2009 @ 11:49AM
stumped said...
I was told that the oil price increase at the gas station pump is due to the oil companies charging more for "holding" fees? If this is true, then we're being railroaded again, and here's an idea - why don't they fire the ones who can't tell the oil producers that they don't need any more oil right now - because the American consumer is getting smarter and we're tired of being taken advantage of!!!!!
1-27-2009 @ 12:32PM
Iridium said...
So much oil that it can't even be stored. Brazil announcing a 100 billion barrel find. Yet the traders say they want oil to go up.
It has nothing to do with supply and demand. Oil traders want the contracts to go up to pocket money since they are losing money everywhere else. They will drive the price up regardless of the fundamentals to steal money.
If oil goes above $50 we need to kill an oil speculator every day until the price goes back down. Oil speculators are terrorists holding the world ransom. The ransom is a higher oil contract so they can pocket money for doing nothing.
This market will be manipulated until the government steps in or the people do. If we start killing oil speculators the price of oil will return to a real market price within days.
If you run the price of oil up just to make a quick buck then you deserve no mercy. You prove that your personal greed takes precedent over the well being of the rest of the world. 100 years ago a few thousand people would shoot you dead on sight.
1-27-2009 @ 1:04PM
Kent said...
Gasoline prices have edged up to about $1.90 a gallon in the last couple weeks in my neighborhood which to me indicates the oil companies expect oil prices to inch up. Consumers should be aware that when managing inventories, the price-points are determined by replacement costs; not actual costs of the inventory. It's up to the consumer to pare down their consumption of gasoline as well as they having been doing so far to insure prices do not return to those obscene levels we witnessed last summer.