Oil Prices Bounce Off the Bottom; How Far Will They Run?
Oil prices are one of the most erratic commodities to invest in. Not only are oil prices affected through the various economic phases globally, but geopolitical tensions are an active ingredient that makes the situation quite volatile. Predicting markets when it comes to oil prices is even more challenging, as there are many issues when it comes to both the supply and demand side of the equation.
With the economic data that has come out globally, it is very evident that not only are Europe and Asia slowing down, but the U.S. is as well. The financial crisis in Europe has severely dragged down their economy. This slowdown has driven down demand for oil and, thus, oil prices with it as well. China and India are both slowing down as well, adding more pressure to oil prices.
On the geopolitical front is the Middle East, as usual. In spite of the drop in oil prices over the past few months, Saudi Arabia has continued to pump large amounts of oil. Heading into July, Saudi Arabia is now producing above average oil output for the sixth month in a row. While the initial rise in oil output was to make up for the loss of Iranian output, due to the sanctions about to hit that nation, oil prices have continued to fall. Saudi Arabia has continued to pump out oil in order to drive oil prices down to hurt the Iranian government. Since most of the revenue Iran generates comes from oil, it feels more pain the lower oil prices drop. The push by nations to stop the Iranian regimes from furthering their nuclear developments is now a truly global effort.
Chart courtesy of www.StockCharts.com
With that said, oil prices have become extremely oversold when looking at the technical analysis picture. Note the Relative Strength Index (RSI) on the above chart and the duration that it spent in oversold territory. In technical analysis, this level of oversold condition will produce a bounce back for oil prices, but the key is to wait for a break of the downward trending resistance line. This has just occurred, and short covering has driven oil prices up toward some key levels in technical analysis.
With new reports that Iran might close the Strait of Hormuz, buying pressure has been added, as can be seen by the massive bars for oil prices. Technical analysis will tell us that the 50% level or approximately $94.00–$95.00 area will be a tough resistance level on the way up. Note on the chart how many times oil prices have pivoted on that level, as seen by the circles. In technical analysis, the more times a level is used as a pivot, the greater importance one should attribute to it. Another big level in technical analysis is the 200-day moving average, which is just above the previously stated range. While no one can predict how the geopolitical events will unfold, oil prices will certainly be affected, and using technical analysis can at least give some reasonable price levels to watch out for both support and resistance.