Oil Market Update

Oil’s recovery rally is believed to have run its course, and it should now roll over and drop – soon, or immediately. This rally was by fanned by fears associated with the unrest in Yemen, but it does not alter the fact that there is a huge glut against the background of a frail world economy lamed by debt.

In the last update, which was bullish partly based on COTs, we said that if oil should succeed in breaking above the resistance at the upper boundary of its W or Double Bottom, a rally would ensue. That is what has happened, and oil has gone from being massively oversold at the start of the year to substantially overbought now – not bad considering that the overall trend as shown by its 200-day moving average is still down.

On the 1-year chart for Light Crude we can see how, after completion of the W or Double Bottom, oil broke above the resistance at the top of the pattern and then rallied further to become substantially overbought. The steeply falling 200-day moving average now coming into play above is a stern reminder that the major trend is still down, and given how overbought it is already it is considered unlikely that the price will get as far as the 200-day moving average before it rolls over and drops again – it would only take the market starting to think more about the glut than about what is going on in Yemen.

The 6-month chart for Light Crude shows recent action in more detail and in particular that the uptrend in force from the March low is converging somewhat, making it a potential bearish Rising Wedge. Also the advance appears to have been running out of steam over the past week.

With regard to the oil COT, we can see on the latest chart below that, although positions moderated just a little last week, overall the Commercials have been piling on the shorts again in recent weeks as oil has risen, to their highest level since last October, increasing the chances of a reversal.

Click on chart to popup a larger clearer version.

The picture looks even more bearish for oil stocks, which have been living a charmed life considering what has happened to oil itself over the past year – in comparison they have hardly dropped at all, which is thought to be due to them being propped up by the market as a whole which has remained on the upward path throughout.

However, despite their resilience, we can see on the 1-year chart above for the XOI oil index that they appear to be at the classic point to short, or for buying Puts, since this index has risen to the top of a broad uptrend channel, into a zone of considerable resistance and arrived at its falling 200-day moving average, and for good measure it has already started to break down from its recent steep short-term uptrend channel in force from the mid-March low, which we can see more clearly on the 6-month chart below, all of which makes it highly vulnerable to a reversal and selloff soon, which could be severe if the broad market breaks down – and how likely is that?

You will have all heard by now that “It’s different this time” – and in some respects that’s true of course – governments have now abandoned any pretense that they are one day going to balance the books, and have resorted to outright theft via QE and robbing the accounts of savers via negative interest rates etc – and the next trick they have lined up is to increasingly force a cashless society onto citizens so that you will have no choice but to have a bank account which they can then plunder at will. If you try to withdraw a large sum of YOUR MONEY you will be interrogated as to the reason. But is it sufficiently different this time round to negate the implications of this??...

Click on chart to popup a larger clearer version.

Update 1 day later on morning of the 6th – oil rose quite sharply yesterday and overnight in Far East trade on the release of data which indicates that the supply glut may be easing somewhat. However, crude inventories in the US are still at their highest level since 1930. Rather oddly, oil stocks dropped hard yesterday at the same time as shown by the XOI oil index. While this was partly attributable to the market as a whole falling yesterday of course, it also a sign that stock traders are anticipating a final high in crude for this uptrend, so it looks like it will turn out to be a “sell on the news” event, which is what we would expect - oil is viewed as an immediate short here.

End of update.