Oil Investors: This Is Not the Time to Dump Oil Stocks
There has been some dumping of oil stocks out there, as the price of the December West Texas Intermediate (WTI) futures contract plummeted below $90.00 per barrel to the $85.00 level on Tuesday.
After trading at $115.00 in May 2011, we have seen oil prices slide despite multiple attempts at rallying back to the $100.00 level. With the downside move, oil is back in a technical bear market, down 22% from its contract high in March 2012 and below its 50-day moving average (MA) of $94.17 and 200-day MA of $96.88.
Yet the chart below is displaying what looks like a bullish flag formation setting up, which means higher oil prices could be coming to back over $100.00 in the best-case scenario, based on my technical analysis. You need to be watchful of the $80.00 support level, which was breached on several occasions but in each case, there was a rally after.
Chart courtesy of www.StockCharts.com
I believe oil will continue to hold above at least $80.00 a barrel going forward and will rally as the global economy strengthens. If you extend the oil futures contract to 2020, the current prices range from $84.00 to $93.00; so I’m not that worried, and I don’t have the urge to go and sell.
Helping to add the support will be the continued erosion in the major economies in the eurozone, the U.S., and China. Geopolitical issues in the Middle East will also have an impact on oil prices.
I also expect oil prices to be supported by the oil cartel, the Organization of Petroleum Exporting Countries (OPEC). OPEC estimates oil prices in nominal terms could hold in a range of $85.00 to $95.00 a barrel for the rest of this decade, according to its internally produced World Oil Outlook report. The report blames the spikes in oil prices as driven by speculators, which I fully agree with, but it is part of the business. An interesting note in the report is the assumption that oil will reach $133.00 per barrel by 2035.
It’s interesting to understand how the oil cartel thinks. The report says that the current level in oil prices is due to the state of the global economy that “will be marked by below average trend growth, in combination with high unemployment in developed economies and continuing global growth imbalances.” (Source: World Oil Outlook, Organization of Petroleum Exporting Countries, 2011, last accessed October 23, 2012.)
And while oil prices are estimated to trade below $100.00 a barrel for the next eight years, you know that there will be volatility that could drive prices to well above $100.00.
With the 12th-largest oil reserve in the world, any major disruption to the oil flow from Libya could send world oil prices surging. Likewise, a conflict in Iran could send oil prices higher.
In my view, I would be looking at accumulating oil stocks on weakness.
Tags: oil stocks