It Is Time To Get Bullish On Oil
A Rounding Top? Maybe Not
I’ve been watching a rounding top formation in the oil market for a couple of months now. The formation looks pretty bearish and is supported by the indicators but that may not play out. After reviewing the latest EIA short-term forecast, consideration of recent economic data, and now Hurricane Laura, I think it may be time to start getting bullish on oil.
Oil prices came under pressure last year when inventory, storage, and production all hit record highs. More than that, at the same time production growth was outpacing demand growth which meant the over-supply situation had no hope of ending. The pandemic worsened the situation because it took the bottom out of demand creating an even bigger supply glut. Now things are different.
While supply continued to build in the 1st half of the year production cuts within the industry have the situation in reverse. Even with demand pandemically-restricted it is more than enough to overcome production and draw down supplies. The EIA thinks this situation will persist into 2021 and elevate prices above $40.
Looking at the economic data, data from the Philly Fed, the Leading Indicators, flash PMI from Markit, the housing data, and durable goods all point to a strong economic rebound. A strong economic rebound, fueled by double-digit declines in inventory levels, means rising demand for oil products and I don’t think this is factored into the EIA’s forecast. So, demand is going to rise in the second half at a rate faster than anticipated, inventories are going to fall at a surprising rate, and oil prices are going to respond because of it. And none of that includes the storm. Hurricane Laura has 85% of production curtailed and causing billions in damage. Production may not come back on line completely for weeks and when it does rebuilding efforts will boost demand.
Taking this to chart I think it is still easy to see the rounding top I have been watching. Price action is still rounding but, counter to my expectation, but the set-up has yet to result in a sell-off. If anything, the support for price action at this level is growing and that is becoming evident in the indicators. First, price action remains above the short-term 30-day EMA where it is firmly in the bulls control. Second, bearish MACD peaked (weakly I might add) and now the histogram is set up to fire a bullish crossover. And third, the stochastic formed a third bottom at a higher level than the second, a sign of growing support, and the current set up is bullish. All we need now is a catalyst and follow through in the market.
The trigger for me to get bullish will be a clean move above $42.75 confirmed by both MACD and stochastic. When that happens I expect to see a sustained rally to the $50 region taking place over the following couple of weeks to two months.
