Oil Market Update

US oil inventories have continued to rise to yet another record high. These inventory levels, which used to top out cyclically at about 1.1 billion barrels (for combined inventories of crude, gasoline, distillates and other oils) have now arrived at 1.4 billion barrels. This is their highest level since at least 1990 and going forward they should exert continued downward pressure on oil prices, and this downward pressure is likely to be exacerbated if we see weakness in the economy, which will be presaged by falling markets, and markets have just started falling, dragging oil prices lower already.

Despite the above fundamentals, the charts for oil don’t actually look all that bad at this time. On the 3-year chart for Light Crude, we can see that after the severe bearmarket from mid-2014 through early this year, which resulted in extreme lows that were ruinous for the industry, the price has bounced back towards more normal levels, and has now stabilized in a converging trading range. While the fundamentals do suggest that the big recovery rally this year was a bearmarket rally and that lower prices lie ahead, this chart is technically neutral with a slight upward bias, since the 50-day moving average is above a slightly rising 200-day.

On the year-to-date chart for Light Crude we can see the action thus far this year in detail. The recovery rally from the February low to the June peak saw the price almost exactly double. This move was corrected by the ensuing drop into the early August low, after which the price turned back up again, and it now looks like a converging trading range is developing that could lead to a break in either direction. For now the trend is neutral but it should be noted that a break below the early August low above $39 could set off another downleg which in adverse market conditions could even take it to new lows.

The long-term 20-year chart gives an overall perspective on the course of the oil price. On this chart we can see the extreme highs above $150 preceding the 2008 market crash, which saw the price plunge all the way down to just $34, then a big recovery move back to the $100 - $110 area, before the 2nd major bearmarket in oil in less than 10 years struck in 2014. On this chart it looks like oil may be marking out a large base pattern here, and factors that could drive it higher include a general commodity bullmarket developing, which could be triggered by the start of “helicopter money” and the destabilization of Saudi Arabia, which is a growing risk.

As for oil equities, whose prices are determined as much by the trend in the broad stockmarket as by the price of oil, we see on the year-to-date chart for the XOI Oil index, that it is moving more or less in sync with the oil price, and has been stuck in a rectangular trading range since April, with quite clearly defined support in the 1070 area and resistance in the 1170 – 1200 zone. The trend is thus neutral and will remain so until we see a breakout either way from this range.

On the 3-year chart for the XOI index, we can see that there is scope for a sizeable move in either direction once it does break out. If oil should drop and the stockmarket tank then it would be expected to drop back towards its lows early in the year, although we should be clear that the breakout from the downtrend in force from mid-2014, coupled with modestly positive moving average alignment does make an upside breakout and rally a possibility here. However, we are expecting the stockmarket to drop over the short to medium-term, so this looks unlikely.

End of update.