Is Oil Moving Up, Down, or Sideways?

Ever since the bubble burst in oil last summer, OPEC has been feverishly cutting production levels. At this point, OPEC has a goal of cutting 2.2 million barrels a day for this month. However, while downtrend in prices has slowed, why has the price not rebounded, as some might expect?

Part of the reason is that the economic forecast for 2009 is still grim. Some believe that if the world continues to be stuck in a recession for a large remainder of 2009, the desire or need for crude oil will decrease. Businesses will use less resources and consumers will spend less.

The other factor to consider is the new administration in the United States. Will President Obama manage to get both sides of the aisle to agree to a workable energy policy? Considering that most Americans have the memory of paying over $4.00 a month for gas fresh in their minds along with the tough economic conditions, this might be the perfect environment to push through comprehensive legislation. How far would he go? This is what bothers the street. The market does not like uncertainty. So, from a news perspective, the oil market is still operating in the dark.

However, things might be slowly turning positive for the oil bulls. There are some indications that the trend may be changing. First, RSI is showing positive divergence. Normally, after a new low is made on the chart, the RSI should also make a new low. When oil made a new low in December, the RSI failed to confirm. Second, an argument can be made that a double bottom is forming. A buy signal would be generated at 38.75. However, there is some resistance in the $40 area, so it might be prudent to wait until this area is cleared.

While one should not ignore the fundamentals, pay particular attention to the price action. The market looks ahead. So, the new trend will be in place before fundamentals demonstrate that conditions are indeed improving for those long oil.

Disclosure: No positions.

Comments

[investor88:]

Fair analysis, no strong trends either way.

Jan 27 09:26 AM

[Hefaistos:]

What's interesting with oil, is that it has a strong tendency for long-term trending. Which is of course very tradable, once the trend is set. I'd suggest that new bottoms will be set during spring, due to bad macroeconomic news and bad earnings reports. But I also see that the oil market is very eager to set off on a new up trend, supposedly doubling from the new bottom.

Jan 27 11:26 AM

[Ishortyou:]

nah....new age technologies will decrease demand for fossile fuel to send Russia and the middel east to the stone age, that will give us an advantageous strategic position.

Jan 27 12:21 PM

[toobad41:]

From all this analysis which way is the market going? I don't believe you even came close to answering your original question.

Jan 28 09:22 AM

[The Greates...:]

It is a industry that has reached its peak and needs to go the way of the dinosour. Clean, new affordable forms of energy are becoming readly availible and we should take this time to cut all ties to this by gone era.

Jan 28 04:17 PM

[The Greates...:]

Also it is greed that put the whole world in the economic state that we are currently in today. The oil companies and our government are totally to blame for all of this.

Jan 28 04:19 PM

[The Greates...:]

Get off oil today, call, write, fax and email your representive today and tell them to get off oil and get on alternative energy today!

Jan 28 04:24 PM