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Little point in adding to the mountains of rhetoric so it is straight to the chart:
click chart for more detail
One of the pleasing aspects of just dealing with the chart is you can ‘plain speak’.
So what can we see? A couple of interesting observations can be made. The first and obvious one is that we may see oil head to US$110/barrel. Well it is almost there, so no prizes for that call. The second point is a more interesting one and that is that we may see this happen over the March to July period. Does that mean if oil hits that zone by March it then stay there for the next several weeks, maybe to July? That is not a conclusion we can make from the chart although it is a possibility.
If we were to look at another chart we see that a pullback is a possibility:
click chart for more detail
But what we can see from the chart is that even though there is a possible pullback to US$80 – a decent retreat – oil is going to stay relatively high for the next 18 months. Not good for inflation but it is consistent with the view of many economist that we will see a mild recession and not just in the USA.
So if oil is going to stay relatively high are oil stocks still good buying? Not neceerrarliy as it is possible we will see a negative divergence. That is, we could see oil head higher but oil stocks head lower.
Why? We could see equity markets head much lower and oil stocks will follow. With stocks, Intos who drive the markets are more concerned with earnings growth potential, not just maintenance.
But then, you say, this is all ‘fundamental’ rhetoric. Maybe, but my starting premise with oil stocks was the charts. So if you care to check out oil stock charts you will see weakness.
Of course you can make money going short on oil stocks and going long on oil futures – but timing will be everything!
Enjoy the ride
Tom Scollon
Chief Analyst
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