Drilling Down Toward an Oil Bottom?

(click to enlarge)

I’ll admit I never thought oil would drop this low and I find myself wondering when it’s going to hit bottom. I pulled up this 10yr monthly chart to put everything in perspective and what I found is that it could drop another 6-7 points, and still not violate the long term uptrend of the chart.

This huge move down could be the market taking into account the worldwide recession that we’re in now and what we’re going to go through in the next 6-9 months and could potentially find support somewhere around the $60 range. All markets are forward looking and I think as investors it’s easy to lose sight of that when your stuck in that 'now' moment.

I circled the RSI to show that it’s still above 40, and has not dropped below that level since 2002, demonstrating the true strength of this chart. I would be looking for some capitulatory signs in the charts such as a candlestick with a long tail going under it’s long term trend or some day when the U.S. Oil Fund ETF (USO) has a day where volume topples 30 million shares with a significant move down.

This may continue to move down, but at the very least, in the very near future there should be some time of trading rally where energy stocks should do quite well. However, if we drop through 60 and free fall to 50, all bets are off as to where a bottom may be. If that happens, at least our fuel bills will go down at the pump and that would be a huge positive for the overall stock market.

Comments

[Ferdinand E...:]

You don't have to worry about oil and its producers. They can take care of themselves. The sorry state of the international macroeconomy explains what is happening to the oil price, and it will continue to happen for a while.
So what? The oil producers have had two beautiful years, and as a result they can relax and try to figure out when they will enjoy a few more.....

2008 Oct 24 08:10 AM

[scfranklin94:]

fundamentals>techni... supply>demand for a semi-inelastic commodity means the price will go to the variable cost of production, which will be around $40, once it stays there awhile the tar sands will stop production and then prices will rise back to the $60-$70 range until such time as demand re-emerges from this slump.

2008 Oct 24 08:11 AM

[Paul Killinger:]

Yeah, which would mean GM will start building SUV's again.

2008 Oct 24 12:05 PM

[Kunst:]

Oil was overbought during the bubble and it is oversold now. Buy energy stocks now and you will be happy soon enough.

2008 Nov 02 01:32 AM

[User 167260:]

Oil , Freds got it right, I'd say, Oil is a dead stick short term, The way to keep it down is alternative energy, There has to be a happy medium between them all and that will make more choice and more affordable, hence, more jobs created. Diversity is key to growth.

2008 Nov 02 09:17 AM