The Next Oil Sprint
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The Next Oil Sprint

by | published January 22nd, 2019

Sometimes, it is not a raw figure so much as a significant development in a trend that tells me what is likely to happen next in the market.

As a result, as we come out of a long holiday weekend, and for the first time in several weeks, I am not fixated on short-term crude oil prices.

Why?

Because West Texas Intermediate (WTI), the daily benchmark crude rate set for New York futures contracts, provided an important technical level at the close of the most recent trading session on Friday, January 18.

It’s what I refer to as the “burst point,” which is one of several indicators I follow daily. A burst point involves what’s called a rolling average. A rolling average adds each new day’s performance while deleting the oldest in a data series.

Now, a burst point occurs when a daily improving performance in oil prices results in that session’s weekly rolling average of at least 6%, a rolling monthly average increase amounting to twice that of the weekly, and a 50-day rolling average exceeding the 200-day rolling average.

This last element is what some of you more technically minded folks may recognize as a variant of something usually called a golden cross. However, the cross in the case of my burst point calculations is one of the elements, not the deciding factor. Oil is hit daily by a number of factors exogenous to the market, which usually make a single technical read insufficient.

In the current market environment, it may well prove to be very important, as it portends an impending advance in the underlying price of oil.

However, this does not mean a straight move up.

There will be declines, but they are taking place in an overall rise in the price.

Here’s how…

Blast from the Past

The combination of these daily, weekly, monthly, 50-day, and 200-day rolling averages has only taken place two other times in the past eight years.

On each of the two previous occurrences, the trajectory of WTI prices moved up over a more extended period thereafter.

It is not the raw price that is decisive in this.

It is indicated direction that becomes important.

For example, the occurrence in 2012 occurred when WTI was at $92.97 a barrel. The 2016 example resulted when it was only at $52.98, or slightly lower than it opened this morning.

But there are other elements are afoot that might lead us to conclude that an “oil sprint” may be developing…

A Tale of Two Benchmarks

First of all, there needs to be clear indication that a pricing floor is developing.

Even with daily pricing levels declining upon occasion, on each of the last fourteen occasions in which the intraday WTI price has tested support levels, those levels have held.

It is also important to note that on each of those occasions, the 50-day rolling average had bettered the 200-day.

Second, the broader indicator of the WTI-Brent spread remains in focus (Brent is the other major dollar-denominated crude oil pricing benchmark, set daily in London).

With few exceptions, Brent has had a higher price than WTI in daily closing figures since mid-August off 2010. And while both are the overriding global benchmarks, Brent is more often employed as a yardstick against which oil in global trade consignments is priced.

Both Brent and WTI are better grades of crude – having less sulfur and impurities, i.e., sweeter and lighter – than most oil traded worldwide, meaning cargoes are most often priced at a discount to the two standards.

A widening spread between these two benchmarks indicates the global market is likely to be moving WTI higher, rather than bringing Brent down. On only one instance since August 31 of last year (that being on September 20), the spread has been above 10% of the difference between the two as a percentage of WTI.

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With the spread increasing – it has averaged more than 15% over the past 25 trading sessions, the highest level since I began calculating it over a decade ago – the consensus emerges that global factors will be further pulling up WTI.

And remember, this is a trend we are currently observing; prices may vary from day to day.

Against this rather mundane background of statistics are more obvious elements…

An Indication of Upward Movement

The global oil supply is elastic, but stable considering the presence of ongoing strong global demand.

As I have recently discussed here in Oil & Energy Investor, all of the seminal reports – OPEC, the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA), along with several major international banks and commodity trading companies – are pointing toward a constriction in supply by the middle of 2019.

Now, there is considerable in situ (i.e. readily available but still in the ground) excess reserves that can be readily brought into the market, especially from U.S. producers. That will temper any overheated spikes in price.

Nonetheless, the balance emerging will support a rising price.

This is especially the case as continued production crises continue in Venezuela, Libya, and Nigeria, while Saudi Arabia and OPEC increase production cuts to support higher prices.

There remains plenty of additional production available in the U.S., but an increasing difficulty in exporting sustainable major increases in American exports to where the global demand is, given port and infrastructure capacity levels.

All of this combined means we are likely to see a rise in oil price moving forward.

And a rise in the opportunities for profit.

So stay tuned.

Sincerely,


Kent

P.S. When oil prices rise, so do the profit opportunities. That’s something I can tell you from experience. Experience that’s written extensively in my inches-thick Rolodex. I’ve kept it in my desk drawer for years, and now’s the time to share the benefits of it with you. In the coming weeks, as the oil market continues its recovery (for the reasons stated in today’s column), you can be sure that my Rolodex will be helpful in spewing out some very interesting profit opportunities. To be sure you’re in the loop, just click here to learn how to get access to it.

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  2. January 26th, 2019 at 22:10 | #2

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