You may recall that we reviewed a range of attractive large oil stocks at the end of July – early August and as they were at quite good entry points after a dip they are mostly up, but not by much, as the sector has been relatively tranquil this month. However, this quiet period looks like it is about to end. While the charts indicate that the sector could break in either direction which is hardly surprising given the capriciousness of the current occupant of the White House, both the fundamental outlook and various technical factors that we will consider on the charts suggest that it is set to break to the upside, perhaps in a dramatic manner.
The charts for Brent Crude and the United States Oil Fund show to advantage the current standoff and provide clues as to how it will end. We are using 7-month charts here because they show the lead in to the March spike higher due to the attack on Iran and the entire bull market phase from then.
Brent Crude, $88.21
Starting with the 7-month chart for Brent Crude we see that, following the big runup in March on the Iran attack, its price formed a Double Top in March and May before a heavy correction back to where it was even before the attack, a truly remarkable development considering that the oil supply was still heavily restricted. The correction from May is a hybrid pattern that is at the same time a potential Cup & Handle base, a Head-and-Shoulders bottom and also a Symmetrical Triangle, with the first two of these suggesting that it will resolve into a new uptrend taking the sector to new highs, an outcome that is supported by bullish volume indications on the stock charts as we will soon see. With respect to timing, the Symmetrical Triangle shown on this chart and on the chart for the United States Oil Fund is fast closing up which means that we can expect a larger move soon and this fits with the fundamentals with the Strait still not open or open in a very limited way, despite claims to the contrary, and them literally “scraping the barrel” as tank bottom is reached around the world with reserves close to complete exhaustion, a situation that, if not resolved quickly, will lead to a price explosion.
United States Oil Fund, USO, $129.79
The 7-month chart for the United States Oil Fund is similar and here we see a confluence of bullish factors. In addition to the hydrid price pattern described above for Brent, we can also see that moving averages are in strongly bullish alignment, the volume pattern is powerfully bullish with huge volume on the Spring rally that died right back on the correction, which is why the Accumulation line has remained elevated and it has even pushed new highs this month with the MACD indicator showing that there is plenty of leeway for a big move in either direction soon, with the other factors pointing to it breaking to the upside.
Now we’ll take an updated look at the charts of a couple of large oil stocks.
BP Amoco, BP $41.98
The chart for BP Amoco looks much the same as when we looked at it about a month ago but we can also see that its technical condition has continued to gradually improve as the relative inaction of the past month has allowed time for more of a Right Shoulder to form and for the moving averages to swing into more bullish alignment with the 50-day turning up and the 200-day catching up some more. The dip of the past week or so is thus viewed as throwing up another opportunity to buy at a better price. In considering BP Amoco as an investment it is worth factoring in that its annual dividend payment is 4.8%.
Conoco Phillips, COP, $130.71
Conoco Phillips on the other hand hasn’t hung around waiting for a rising oil price to bolster its stock price – it got on and did what we expected without delay, breaking out of its Head-and-Shoulders bottom and even advancing to new highs, although it has since backed off some. This outperformance is a positive sign and it is expected to continue strong and is thus viewed as a conservative buy on any dips, like the current one. In considering Conoco Phillips as an investment it is worth factoring in that its annual dividend payment is approx 2.5%.
Their prices being overall little changed in the interim, the oil stocks recommended in the articles REVIEW OF 5 MAJOR OIL & GAS STOCKS as OIL SET TO SOAR posted on 28th July and REVIEW OF 5 MORE MAJOR OIL & GAS STOCKS as OIL SET TO SOAR (part 2) posted on 2nd August continue to be rated buys here for much the same reasons, the difference now being that the expected moves are more likely soon than they were then for the reasons set out here. There are also some more big oil stocks that were shortlisted back then but put on hold pending developments that may be introduced in a separate article.
One final important point that the market does not appear to have fully taken account of. The effective closure of the Strait of Hormuz has reduced global oil supplies by something approaching 20% with the effect of this having been partially masked up to now by the running down of buffers and reserves but there is another development that is having an increasing impact; Russia used to be a significant oil producer but now, with a significant proportion of its capacity having been impacted by Ukrainian, that is to say Western, drone attacks it has gone from being a net oil exporter to a net oil importer. This means that global oil supplies have been cut now by somewhere between 20% and 25% and so, as reserves run out completely in the near future, we can expect either big price hikes for all oil products or rationing, or both. So this certainly looks like an opportune time to buy the stocks of non-Mid-East oil companies. Even if the Strait is fully opened immediately, which doesn’t look likely, if would take many weeks for supplies to feed through the system.
End of update.
Posted at 3.00 pm EDT on 28th August 26.