The Play You Can Make on Oil Prices

Play You Can Make on Oil PricesThe U.S. and global economies are continuing to show some encouraging signs. The U.S. gross domestic product (GDP) growth in the fourth quarter contracted 0.1%, according to the U.S. Department of Commerce, as compared to the estimated growth of 0.1% by and the 3.1% annualized reading in the third quarter. There are no worries here, though, as the GDP reading was impacted by lower government spending and less inventory growth. The reality is that the U.S. is expanding.

The U.S. Energy Department raised its projections for oil prices this year, adding that global oil consumption will rise to a record high in 2013. (Source: Shenk, M., “U.S. Energy Department Raises 2013 Oil Forecast,” Bloomberg, January 8, 2013, last accessed January 31, 2013.)

Overseas, the eurozone continues to be in a recession, but there are some signs of growth; while it’s still early on, these are positive signs as the region is a critical region of the global economy. China, the world’s second-largest economy, is also reporting improved economic readings in industrial growth, consumer spending, and manufacturing. So is Japan, but I’m convinced that the country will continue to struggle to find growth. (Read “Japanese Economy Remains in a State of Comatose.”)

With global growth expectations on the rise, oil prices have also been edging higher toward $100.00 a barrel.

Recall that when oil prices recently fell below $80.00, I advised against selling.

Take a look at the price chart for the spot West Texas Intermediate (WTI) futures contract. After trading at $115.00 a barrel in May 2011, we have seen oil prices slide downward despite multiple attempts at rallying back to the $100.00 level. The spot WTI just broke above its 50-day moving average (MA), and it remains above its 200-day MA, displaying a bullish golden cross on the stock chart below. For oil to move higher, a strong break near $100.00–$102.50 is needed.

The chart is also displaying what appears to be a bullish flag formation setting up, which means that oil prices above $100.00 could be coming back in the best-case scenario, based on my technical analysis. You need to be watchful of the $80.00 support level, shown by the solid, blue horizontal line, which was breached on several occasions and was not followed by a rally.

$WTIC Light Crude Oil stock market chart

Chart courtesy of

I believe oil will continue to hold above $80.00 a barrel going forward, and it will rally as the global economy strengthens. If you extend the oil futures contract to 2021, the current prices range from $84.00 to nearly $100.00, so I’m not that worried. However, it will be tough for oil prices to break and hold at $100.00, based on the futures expectations.

I also expect oil prices to be supported by oil cartel Organization of Petroleum Exporting Countries (OPEC). OPEC estimates that oil prices in nominal terms could hold in a range of $85.00–$95.00 a barrel for the rest of this decade, according to its internally produced World Oil Outlook (WOO) report. The report blames the spikes in oil prices as driven by speculators, which I fully agree with, but it is part of the business. An interesting note in the WOO report is the assumption that oil will reach $133.00 per barrel by 2035.

It’s interesting to understand how the oil cartel thinks. The report says that the current level in oil prices is due to the state of the global economy that “will be marked by below average trend growth, in combination with high unemployment rate in developed economies and continuing global growth imbalances.” (Source: World Oil Outlook 2012, Organization of Petroleum Exporting Countries web site, last accessed January 31, 2013.)

And while oil prices are estimated to trade below $100.00 a barrel for the next eight years, you know that there will be volatility that could drive prices well above $100.00.

In my view, I would be looking at accumulating—NOT selling—oil stocks on weakness.