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.