Oil and energy stocks are normally not on our radar screen at ETF Maximizer but President Obama's recent speech about manipulation in the oil markets peaked our interest and here's what we found.
Back in February, John Burbank founder and chief investment officer of Passport Capital LLC predicted that "the price of oil would continue to rise until the economy breaks". Since Mr. Burbank's forecast, the price of energy and oil related Exchange Traded Funds have been in a downward direction. Actually, the price of DIG, the Ultra Oil and Gas Fund and most other oil and energy-related ETFs peaked on or close to February 24 and have been in a downtrend ever since. But it appears as though the selling is abating and therefore it may be time to start accumulating new positions in energy and oil funds like XLE, XOP, IEO, PSCE and DIG. Seasonally, we are moving into the summer driving season and this always drives the price of oil higher because of higher demand.
Another contributing factor to the forecast for higher prices ahead are the recent actions by Central Banks in the U.S. and Europe. Oil is making new highs in euros and pounds and soon will be in dollars because of central bank easing. Central banks in Europe are flooding the European economies with euros in order to stave off an economic collapse of the eurozone. Stateside, the Federal Reserve's Operation Twist is really just QE3 in disguise. Both of these activities are affecting the prices of various commodities like oil.
Congressman Joe Barton, a member of the House Committee on Energy and Commerce is also forecasting higher prices ahead. Recently, he observed that "even with the Arab oil cartel and the strategic petroleum reserve and things like that it is still a demand market and right now demand is rising more rapidly than the ability of the market to supply it, that's the primary cause of high prices now."
A new Bloomberg survey shows that "gasoline inventories dropped 2.6 million barrels and are forecast to slip another 1.1 million barrels. Distillate supplies, a category that includes heating oil and diesel, fell 2.4 million barrels compared with a projected 125,000 barrel decline". So the supply side of the equation is dropping while the demand is increasing. Clearly, from a fundamental perspective it appears that we are once again setting ourselves up for a rally in the price of oil as we move into the summer months.
From a technical standpoint, the charts are painting a similar story as it appears as though the momentum behind the selling that started back in late February has exhausted itself. This should allow the oil and energy ETFs to put in a base and start to rally.
The first chart below shows the price of XOP, the S&P Oil and Gas Exploration Exchange Traded Fund. A close examination of the strength of the down moves with respect to the bottom Bollinger Band shows that the price exceeded the bottom of the band on 4/11/12, and then traded back up through the band. Since then, the price has made two more lows close to the price on 4/11/12 but not exceeding the bottom of the band. The bottom band is 2 standard deviations away from the 20 day moving average of the price. The movement of price with respect to the bands gives a clear picture of how extreme a down move or rally in price is with respect to its history. Note that the indicator below the price is starting to make higher lows since the extreme price excursion on 4/11/12; this indicator is a measure of the standard deviation of the On Balance Volume with respect to its movement over the past 15 days.
When the price of the underlying ETF, XOP in this case, starts to show selling exhaustion supported by higher lows from the On Balanced Volume then the price and volume are telling us that higher prices are just around the corner. Click on the chart to see more detail.
We see a similar picture when examining a chart of XLE, the S&P Select Energy Exchange Traded Fund. Note that the price exceeded its lower standard deviation band on 4/10/12 and then traded back up through it on 4/11/12, and in spite of retesting the extreme lows has not exceeded the band since then supported by higher On Balance Volume lows. Click on the image to see more detail.
Recommendation: Start to purchase new positions in XLE, XOP, IEO, PSCE or DIG. IEO is the Dow Jones US Oil and Gas fund. PSCE is the Powershares S&P Small Cap Energy Portfolio. And finally DIG is the Ultra Oil And Gas ProShares Fund. Note that XLE is the most liquid and heavily traded of the funds listed above and also the least volatile.