Oil… Close to a speedy break out northwards?

Five months ago, I wrote an article about whether the price of oil would reach either $20 a barrel or $100 first.

One of my perennial gripes, alongside death and taxes being two of life’s most irksome certainties, is that those of us consuming oil-derived products will also be on the receiving end of pricing unfairness. This is that when oil prices fall, it takes a remarkably long time for the savings to flow through to the fuel pumps. When they rise, prices leap seemingly instantaneously. The third aspect is that when prices remain flat for a while or indeed gently fall, because journalists will be more focussed on other things than stable oil prices, the petrol station owners can sneak on the odd pence or two. It feels worthy of a Baldrick-style cunning plan. The problem is that we live with this in reality!

Governments and oil companies are seemingly in cahoots to effect said underhand tactics with the result that petrol now is only 10% cheaper than at its April 2012 high, even though oil itself is roughly 55% cheaper.

A glance at the below two charts reveals the disparity perfectly.

Between the summer of 2014 and Valentine’s Day 2016, the price of the underlying ‘black gold’ fell more than 70%.

The price of petrol at the British pumps dropped by….


The disaster that was Brexit has not helped for as a nation we buy oil in US Dollars (rather peculiarly even oil extracted on our doorstep from the depths of the North Sea). With Sterling’s decline, this has meant that we now have to pay more in relative terms.

Enough about looking over our shoulders. What about what lies ahead?

A glance below at the chart from the Pelican platform shows what oil has done in the past 12 months:-

From the low of February 2016, oil has rallied from $29 back to spend most of 2017 firstly teasing above $50, then in rather volatile times prompted by OPEC’s deliberations sliding towards $40, before the bulls have regained the upper hand in a steady three-month acceleration back above $50.

There are a handful of traders whom I follow with close interest. It was the coinciding musings of two of these that has prompted my willingness to write about oil this week. I don’t recall one occasion when both their stars have aligned as such into producing a buy recommendation on the same market on the very same day. One is a world-leading proponent of Gann Theory, a form of technical analysis that focuses on patterns, prices and timing. He is Australian. The other is the CIO of a Hedge Fund located in Chile. He is a trained psychologist who has a latent ability to understand and pre-empt a market’s momentum or impending lack thereof. To have both of them come out within an hour of each other to make some bullish calls on oil made me sit up and analyse what is going on. And if the Gann Theorist proves to be correct, then we had better start stockpiling the petrol / diesel / heating oil or simply sell up and buy electric, for he is predicting a 50% rally in a matter of months…

But are there any fundamentals to justify such a rally?

Well, many experts are now stating that the impact of the US Shale industry depressing prices has been overplayed owing to problems trying to bring all the wells into production and that in fact US shale oil is plateauing rather than accelerating as predicted. This means that US inventories (supplies in depositaries) have been falling around 75% of the time to date in 2017. (They announce these every Wednesday afternoon). US exports are now at record highs as well, owing to the fact that Brent Crude is trading around $7 a barrel more and foreign buyers are buying it as it sits in Oklahoma. This ‘arbitrage’ play can help put a floor on the market in the short term. Yet for the medium and longer terms, we have lower overall global production thanks to OPEC’s more-or-less aligned execution of reducing output to bolster prices and the global economy on a comparatively sound setting across every continent. These should help oil keep heading in an upward trajectory, especially if we have positive vibes coming out of Beijing after their 5-yearly economic strategy shindig this week.

Regular readers will know that I like to check on what the CFTC net speculator position is, as I am more inclined to oppose the herd. A glance at the below will see that speculators were at their least bullish / most bearish in the past 5 years in February 2016 when the price of oil troughed and at their most bullish in February this year, which preceded a drop from $53 to $41 in the price of WTI Crude Oil the ensuing months!

Speculators are much less bullish (positive) than eight months ago, so I could be tempted to take out a long (buy) position.

Looking back at the Pelican chart earlier in the article, should $55 be broken in the coming months, the acceleration in prices could be dramatic.

Whatever your view on oil over the coming months, Pelican is the choice of the experienced trader wanting to build his or her private or public discussion groups. Within your groups, you can see others’ positions, copy or, uniquely, oppose trades, all within a unique FCA-regulated environment.

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