This week alone has seen an increase in oil prices of roughly 5% – 6% and the speculation is that the price increase is all based on the upcoming OPEC meeting in Doha on the 17th of April where the oil producing nations will meet to discuss freezing prices on oil. Regardless of whether these oil producing nations agree or not, it may have very little effect on the overall price of oil. The fact remains that there is such a massive supply of oil still sitting in storage. According to an article I read recently in USA Today, they spoke with an analyst that says oil has the potential to be up at $85.00 a barrel by Christmas of 2016.
The analyst I am referring to is Mike Rothman from Cornerstone Analytics and in this USA Today article he cited that according to Oilprice.com, “The IEA has been accused of overestimating global oil supplies” and that “The Wall Street Journal says that there are somewhere around 800,000 barrels per day that are unaccounted for”. In a nutshell, in my opinion, the overestimating of production may be falsely keeping prices lower. Mr. Rothman went on further to state that “storage is not as high as generally presumed” and that even if countries freeze output, “To defend price, OPEC would need to actively take barrels “out of the hand” of refiners. For the record, Mike Rothman and Cornerstone Analytics is “targeting $85.00 a barrel for Brent crude by the end of 2016.
While all this news of false reporting and production cuts seem to be pushing oil prices higher this week, we are NOT out of the woods yet. Many people don’t realize that oil traded in a $10.00 – $40.00 range for almost 3 decades! Can price go back to and linger at these levels? Of course it can! Although I’m not hoping for lower oil prices as it will put a strain on the global economy and if we fail to break the $40.00 mark and stay above that price level, prices could fall even lower. Oil (CL) traded as high as 39.84 on April 8th, 2016; are we going to drive through that level and stay there, or could is there a large obstacle in our way? Let’s see what the charts have to say:
As you can see, price lingered in the $10 – $40 price range up to mid-2003; you’ll see on the chart where that $40 price level provided some VERY strong resistance for quite some time. This very same price level ($40) has become strong support. You saw on the chart as early as 2004 and 2008 how “sturdy” this level can be. This same level held in July of 2015 but price broke through in November of 2015 and HAS NOT been able to CLOSE above the $40.00 price level since then. What briefly acted as support is once again a strong resistance level therefor a push for higher oil prices could happen, but it may be an arduous climb given the fact that there is such a large supply of oil and we are facing a price level that has been significant for the past 33 years. My plan is to be cautious around this level and continue to manage my risk until price starts to move AWAY (regardless of direction) from this strong price level which is now resistance.
Is there a chance for the higher prices in oil that some of the experts are predicting? I certainly hope so; not only would higher oil prices save an ailing shale industry, but the volatility would certainly help us as traders. Although we did dip below this level a few months ago and we remain below this level still, perhaps the RSI (oversold) is providing us some insight that oil in fact may be on the rebound. For the longer term my thought is that oil will need to get to $60.00 per barrel and hold if we are to get to the higher prices mentioned. If we continue to see prices stay below $40.00 a barrel we could see price drop back into the mid-twenties again and possibly lower. The answers should start to materialize in as little as a few days if oil tries to rally above $40.00. Stay tuned for the OPEC meeting in Doha, it could be just the thing that triggers prices higher.
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