What’s Going on with Oil

Oil is currently trading in a consolidation channel with the March light sweet crude futures contract on the New York Mercantile Exchange, trading between $85.00 and $97.50/$100.00 since November. Oil traded over $100.00 on January 2.

Factors that continue to drive oil trading are global supply and geopolitical concerns in the Middle East. In addition, the Organization of Petroleum Exporting Countries (OPEC) has refrained from increasing its daily production quota.

While oil is down from its record high, the price remains high and is a real threat because of its negative impact on transportation companies that have oil as a major part of their expenses. For the economy, the high oil prices translate into higher corporate costs and could impact earnings. For the consumer, high oil prices translate into high gasoline prices. People will tend to drive less and make fewer trips to the malls, which in turn, impacts retail sales and the economy.

The near-term technical picture for the March light sweet crude is moderately bullish, as oil is currently at the middle portion of the channel and is coming off a bullish minor double bottom. Watch for selling pressure, as oil approaches $95.00 and $97.50. Failure to break higher could subsequently maintain the current sideways channel and could see the March contract fall back towards support at $85.00 to $90.00.

The Relative Strength is neutral, so an upward move would be questionable, although oil can be driven higher by unexpected fundamental news. The March oil is trading above its 20-day and 50-day moving averages of $90.32 and $91.79, respectively, as well as the 200-day moving average at $80.24.

In the upcoming sessions, watch to see if the March contract can break higher. My feeling is that the marginally overbought technical condition could drive some profit-taking in the near term.