Has the Easy Money Come to an End for Oil?
Thursday, August 25th, 2005
By George Leong, B.Comm. for Profit Confidential
Did you notice the slip in oil prices last week from over $66 a barrel for spot oil on the New York Mercantile Exchange to just above $63 last Thursday? So what gives?
On the surface, it is clear that the market is still trying to adjust to oil at over $60 a barrel. And because of this, you can expect some selling pressure at over $60 and as prices move higher. There are still questions on whether $60-a-barrel oil is sustainable.
A look at the technical picture shows an overbought situation, meaning there is some selling pressure as traders begin to lock into some profits from the oil rally. A closer look shows a decline in the Relative Strength, another indication that the momentum in oil may be fading.
But here is what I surmise. Given the high oil and gasoline prices, perhaps consumers and companies are trying to cut their consumption. Maybe car pools and public transit are on the rise. The recent data from the American Petroleum Institute suggested that the demand for gasoline in the U.S. was lower in July compared to a year ago. It appears we are driving less.
The Organization of Petroleum Exporting Countries (OPEC) also helped to pressure prices after it lowered its world oil demand for 2005. It is not that difficult to figure out what is happening.
The reality is the price of gasoline is highly elastic. This means when prices rise, demand falls, and when prices fall, demand rises. It is a simple economic relationship that appears to be holding some truth in the oil and gasoline market. Consumers will not keep on paying for higher oil prices. Instead, they will car pool, ride a bike, run, roller blade, or take public transit to work.
Should I be right in my assessment, then you may want to take some profits on any oil stock that you own. I believe the easy money in oil stocks has been made. It may now be time to move on.
Next Post: Another Reason Why Gold Prices Will RisePrevious Post: Value Investing in 2005
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
