George Spritzer

Crude Oil Prices: Bears Will Soon Win Out

Roger-
You make a good point asking why crude oil prices should weaken right now as opposed to several months ago or some time in the future. Here are three reasons I used-
1) I like to follow relative strength sector momentum models. When a sector is in the 70th or 80th percentile, an upward move can last for quite sometime. But when a sector reaches the >95% percentile, stays there for several months and starts trading very volatile, it is usually near the end of the move. That happened in 2007 with China funds. High yield bond funds on the other hand have been strong lately, but with low volatility, so the move is more sustainable.
2) Look back six months. The Fed lowered rates six months ago by 125 basis points in less than two weeks. Fed rate cuts generally have a time delay of six to nine months before the economy sees the positive benefits which willl kick in over the next three months. The stimulus package willl add more fuel to the fire. Once the economy strengthens, we may even see a rate increase by the end of the summer which will lead to a stronger dollar and lower crude oil prices.
3) Look ahead six months and what do you see- Elections! Markets likes to look six months ahead, and will start reflecting future Congressional actions to bring down crude oil prices one way or the other.