Why You Shouldn’t Sell Oil
When oil prices recently fell to below $80.00, I said don’t sell.
The U.S. Energy Department increased its projections for crude oil prices for this year, adding that global oil consumption will rise to a record high in 2013. (Source: “U.S. Energy Department Raises 2013 Oil Forecast,” Bloomberg, January 8, 2012.)
Take a look at the price chart for the December West Texas Intermediate (WTI) futures contract. 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. The spot WTI is trying to hold at its 50-day moving average (MA), currently above its 200-day MA of $85.08.
Yet the chart is displaying what looks like a bullish flag formation setting up, which means that higher oil prices could be coming, rising above $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 2021, the current prices range from $83.00 to $96.00, so I’m not that worried and don’t have the urge to go and sell.
Helping to add support will be the continued erosion in the major economies in the eurozone, along with its impact on the U.S. and China.
Also add in the geopolitical issues in the Middle East. Iran and North Korea are real threats that could easily drive up oil prices.
I also expect oil prices to be supported by the oil cartel Organization of Petroleum Exporting Countries (OPEC). OPEC estimates oil prices in nominal terms could hold in a range of $85.00–$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 those behind the oil cartel think. The report says the current level in oil prices is due to the state of the global economy, “marked by below average trend growth, in combination with high unemployment rate in developed economies and continuing global growth imbalances.”
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.
In my view, I would be looking at accumulating—NOT selling—oil stocks on weakness.